Analysts predict fixed exchange rate retention by CBN - THE NATION

May 14 2019

 by Collins Nweze

Analysts  at the Afrinvest west Africa have predicted the Central Bank of Nigeria (CBN) will in the next five years, retain the currency fixed exchange and allow gap between official and market-led rates.

President Muhammadu Buhari last week, renewed the appointment of Godwin Emefiele as the Governor of the CBN for another five years term, starting June 2019.

In a report released at the weekend titled: Nigeria's House of Cards: Will Foreign Exchange Policy be Altered?, they said that : "We believe the CBN under Godwin Emefiele would favour keeping the fixed exchange rate and the current misalignment between the official rate of N305.00/US$1.00 and market led rates of N360/$1.

They said a relatively strong external reserves level at $44.8 billion, which provides more than the recommended three months import cover ensures this in the short-term. However, the boom and bust cycle of the commodity markets is inevitable, making the current stability of the currency untenable over the medium to long-term.

"There is the need for a more flexible management of exchange rate to ensure adequate response to economic shocks, which in turn, prevents sharp exchange rate adjustments and sustains foreign investment, forex liquidity and growth. Evidence from previous commodity shocks shows that without a flexible exchange rate system, the chance of an economic recession or weak growth and banking system weakness is high," they said.

The Afrinvest research team said that due to the boom and bust episodes in commodities market cycle, Central Banks in resource dependent countries are making changes to improve the resilience of the financial sector, responses to external vulnerabilities and to meet the goals of monetary policy. In this regard, strengthening regulatory oversight, and adopting a flexible exchange rate policy and inflation targeting is common.

This is becoming clearer in emerging markets such as South Africa, Russia and Egypt. In Nigeria, the latest commodity market shock, the mid-2014 oil price slump, revealed faults once again as forex liquidity tightened due to reduced exports. The implication was weaker government revenues, steep currency devaluations, elevated inflation and weak growth.

"During the week, we observed a faster growth in foreign reserves levels as it rose further by US$30.4m in the week, pulling the foreign reserves up to $44.84 billion (08/05/2019) relative to $44.79 billion in the prior week. We believe that the sustained increase in foreign portfolio buying interest in the fixed income market is largely responsible for the accretions to the reserves although we also acknowledge that stable oil prices and output have continued to favour increased forex earnings," the report said.

In the forex market, the CBN resumed its weekly sales, injecting $205 million into the market to support the currency. The wholesale segment of the market was offered $100 million while the Small and Medium Enterprises (SMEs) segment received $55 million. Similarly, customers requiring foreign exchange for invisibles such as tuition fees, medical payments and Basic Travel Allowance (BTA), among others, were allocated $50.0m.

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Steven Rich
Sep 17, 2018:
Well done

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