Nigerian central bank warns on circumventing FX policy

Nigeria’s central bank has warned banks not to circumvent its new foreign exchange policy as it gave further details on the new measures announced on Monday that have left the naira trading at a record low today.

The central bank said on Monday that it would allow private individuals to buy dollars at 20 per cent above the official rate of 305 to the dollar, raising hopes that a broader liberalisation of the currency system is imminent.

Analysts said it could signal Nigeria was headed for a full devaluation, after the central bank backtracked on its move last summer to a “purely market-driven system” — and effectively re-imposed a currency peg, driving demand back into the parallel market.

On Tuesday, the central bank tweeted a warning to banks and staff against “circumventing [the] new policy on FX.” Later on Tuesday, it announced it would release the dollars at the new rate through wholesale sales to banks, not to individual customers.

On Monday afternoon, after the central bank issued the directive, the naira touched a new low of 520 on the black market. On Tuesday, the rate stayed at that level, according to currency dealers and a website that tracks the black market rate. Last week dollars were trading at the slightly stronger rate of 510, still a 40 per cent premium.

The naira fell on the non-deliverable forwards market on Tuesday, Reuters reported, suggesting anticipation of a full devaluation.

But analysts questioned whether the new policy would ease the acute foreign exchange shortages gripping the country amid its worst economic slump in decades.

They also said that, given the multiple “quasi-official exchange rates” — such as the new one introduced on Monday — the incentive for individuals to take advantage through practices like “round-tripping” – a form of currency arbitrage – were inevitable.

CardinalStone Partners, a Lagos-based financial services and private equity firm, said in research note: “We do not see the move as an ideal approach to addressing the gap between the interbank and the parallel market FX rates.” It continued:

Whilst the new policy will improve retail accessibility to FX, it will further create an incentive for round-tripping and encourage individuals to seek out ways to profit given the significant spread (about 42%) between the likely rate for the school fees/medical bills at N366/USD (calculated as 20% over the current interbank rate) and the parallel market rate at N520/USD.

Nonso Obikili, a Nigerian economist, wrote on Tuesday that the new move was “yet another intervention programme disguised as policy”. He and other analysts said the measure, if anything, would only temporarily narrow the gap between the official and black market rates.

Some saw the move as a step in the right direction. Atedo Peterside, former chief executive of Stanbic IBTC Bank, said: “The central bank was starving 90 per cent of the economy of forex before and erecting barriers to inflows, thereby accentuating a crisis.”

On the watch of Muhammad Buhari, Nigeria’s president, the central bank has been under pressure to keep the naira strong, even as economic growth has contracted and investors have criticised the rationing of foreign currency.

With Mr Buhari currently on extended medical leave in the UK, the nature of the pressure on the central bank is entirely different, say analysts. With Yemi Osinbajo, the vice president, in charge as the acting president, the market is watching for the foreign exchange liberalisation they have been waiting for.