Nairametrics| The exchange rate between the naira and the dollar on the parallel market has dropped below N400 for the first time since August 23rd 2016. This is according to Nairametrics Exchange Rate tracker.
This represents a significant price point for the CBN’s defense of the exchange rate which it started in late February 2017. Whilst we do not know for sure how long the CBN can keep defending the naira, it’s hard to deny the fact that the policy introduced to reduce the exchange rate disparity between the naira and dollar on February 20th 2017 is working.
Our investigation suggests that the key reason for this are increased supply to the retail end, continuous sale of FX forwards and the minimal rate of round-tripping by commercial banks. This has basically thinned out demand on the back market. Another likely reason is the drop in purchasing power of a lot of Nigerians. With little or next to nothing in disposable income, Nigerians are tired of buying dollars for safe keeping. The volatility in the exchange rate is also a dis-incentive for them. No point losing value to exchange rate wars.
Can the CBN continue to defend the naira? It’s unlikely they can continue like this for another month or two. They spent about $1.7 billion in January alone and are estimated to have spent about $2.5 billion (gross) between February and March 2017. Crude oil earnings have helped form a cushion but it might not last for long. Even if it does, it won’t be enough.
What are the options? The CBN has two major decisions to make in the coming days. It will either devalue the currency to a level closer to the black-market rate or float the currency once and for all. We had thought that the latter was a more plausible option. However, recent comments by the CBN Governor that he will not float suggest a devaluation might be on the cards. That expectation will also have to be balanced by the government’s reluctance to raise fuel prices, a direct consequence of a devaluation. Other state controlled prices also hinge on a devaluation of the naira, something the Government ‘controlled’ CBN is mindful of. This suggest the option might be to wait this out a few days more to see if the rate black market rate can come down to N380, a more acceptable rate based on the government’s antecedents.
And there is one last option. The CBN could decide to do nothing, provided it can keep supplying the retail end of the market.
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