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Nigeria’s FX Policy – Radio Silence

Abu Dhabi, 1 June 2016

Offshore investors continue to sit on their hands as we await clarity on the Nigerian Central Bank’s recently announced plan to switch to a more “flexible” exchange rate regime. Directly following the initial announcement last Tuesday, the Central Bank Governor, Godwin Emefiele, said details on the structure and implementation of this new FX policy would be announced in “a few days.” However despite comments over the weekend by President Buhari which appeared to indicate he had given his tacit approval towards the CBN’s proposals there has been relative “radio silence” on the subject since then.

The reasons behind this delay are unclear although some are wondering if the President may have changed his mind, especially when you consider his strong insistence since he came to power that there would be no further devaluation of the Naira, even though the hard currency shortage is worsening daily and USD/NGN is exchanging hands above 300.00 in the “kerb” market against an official fixed rate of 197.00-199.00. This ongoing lack of information has helped reverse last week’s gains in the domestic stock market with financial shares especially hard hit and causing the banking index to drop by 8.55% earlier today.

Domestic calls on the authorities by business leaders, to expedite the release of guidelines on its revised foreign exchange policy is growing, and include the former head of Nigeria’s Institute of Chartered Accountants, Chidi Ajaegbu, who has been arguing in favour of a devaluation for many months now, stating back in February this year that; “The very adamant posture of the government does not apply to economics. Economics does not obey order. We must recognize that for us to attract foreign investors, we have to devalue. There are no two ways about it; we do not have the resources to fund the Naira at the level it is today. We have to tell President Muhammadu Buhari without equivocation that it is not an ego thing but something necessary that must be done to attract foreign investors.”

Whatever the cause we believe that the genie is now out of the bottle and there is very unlikely to be a continuation of the status quo for much longer. As such we still anticipate the unveiling of new FX guidelines imminently, and although it’s hard to guess exactly how this new platform will be structured we think a two-tier currency regime consisting of a more market-driven “investment” rate and a separate fixed (or tightly managed float) rate for “critical transactions,” the most logical path for the Central Bank to follow, although it will need to re-evaluate its near-term interest rate policy as well.

Glenn Wepener
Executive Director & Geopolitical Analyst - Middle East & Africa
Market Insight & Strategy Group - NBAD Global Markets
GlennMaurice.Wepener@nbad.com