Forex unification: Experts worried as naira loses 15.84% to dollar in two weeks

Experts are worried as the naira lost 15.84 per cent to the dollar in two weeks to close at N769.25 as of June 30, following the unification of the exchange rate.

The Central Bank of Nigeria (CBN) floated the naira on June 14, which ended the multiple exchange rate regime, which many analysts believed would check illegal economic activities like arbitrage, round-tripping, and rent-seeking.

A look at the trading activity at the Investors’ and Exporters’ (I&E) foreign exchange window showed that the naira, which closed at N664.04/$1 on June 14, plunged to N769.25/$1 on June 30, and at the parallel market, it slightly depreciated by 1.98 per cent to N773, from N758.

Two financial experts who shared their view with The ICIR agreed that the naira would further depreciate against the dollar, but were, however, divided over how to mitigate the negative consequences against the continuous fall of the naira in the short run.

A development economist, Kazeem Bello, argued that except the Federal government assists, in the short run, in bailing out the CBN by finding foreign exchange inflows into the market, the naira would inevitably continue to take a plunge.

“It (naira) is struggling to find its comfort level in what we referred to as the death valley zone (DVZ) in risk management terms,” Bello said.

The economist, regarding the bail-out as one of the saving grace options available to the Federal government, explained that if the situation was not carefully managed, it could turn the capital market bullish as demand rises, which may keep the exchange rate high for a more extended period.

He said, “The trouble I have with the way the market was fiatly deregulated is the downside effect it is creating for the naira value.

“We have this economic quagmire in Nigeria that when prices go up, they hardly find their way back down due to misconjugated policy implementation.”

He added that any policy that would keep the rate high for too long may be damaging.

Before the deregulation, the CBN’s management of the exchange rate had given rise to multiple regimes that led to illegal economic activities and created deficiencies in supply or inflows in the I&E window.

Bello argued that while unifying the exchange rates was an easy fix, addressing the deficiency in forex supply is practically a market-based problem.

He explained that solving the first issue would assist in injecting inflows into the market, thereby helping to solve the problem of inadequate inflows.

He said, “It is at that point in time that the Federal government can do two things again in combination together: inject substantial sums into the market to dampen the spike in rate, and then simultaneously announce a floating rate forex market regime to deregulate the market operations.

    “When that strategy is conducted in this manner, the rate will be forced to remain bearish and weakened. Hence, we will not see any significant rise. It may rise slightly, but obviously not more than a digit percentage increase. This will equally assist in stabilising the market against any possible shock. For now, we will continue to monitor the market, but it is looking like a tough one down the line already.”

    Opposing any intervention, the executive vice chairman of Highcap Securities Limited, David Adonri, said such a move would distort the market mechanism that the floating of the naira is expected to engender.

    “The forex market is now deregulated. Any seller, whether government or CBN, or any person, can sell. There is no scarcity of forex anymore because, at the market rate, forex is available.

    “There is no need for any intervention because the market is now flexible or self-adjusting to the forces of supply and demand,” Adonri, a financial analyst, said.

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