By Adedapo Adesanya
An American investment bank, JP Morgan, has said the major reason why Nigeria’s foreign exchange market remains illiquid is that despite the liberalisation of the landscape, the Central Bank of Nigeria (CBN) retains a level of control through its intervention mechanisms.
On Tuesday, the local Naira depreciated on the US Dollar at three tracked segments: Investors and Exporters (I&E) (N770/$1), the parallel market (N890/$1), and the Peer-to-Peer (P2P) (N905/$1).
The bank, in its market research document on the Nigerian economy titled, Reform pause rather than fatigue, released over the weekend, showed that since the CBN introduced adjustment to the rates in June, liquidity has not improved as much as anticipated in the I&E window (now renamed Nigeria Foreign Exchange Market – NFEX).
The US bank said, “Interbank FX liquidity has not improved as much as anticipated, partly due to the re-introduction of de-facto controls limiting local trades above 800 and loose monetary policy conditions.”
It also said the apex bank continues to intervene in small amounts at a rate of around N740 and N750, without clearing the backlog of unmet FX demand, a condition that caused a ripple effect in the parallel market rate and widened the rate to around N900.
This is “due to a combination of seasonal summer increase in FX demand and renewed loss of confidence in the local currency by locals.”
“All this is further compounded by revelations that the central bank’s net foreign exchange reserves may be lower than initially thought,” it added.
Business Post reported earlier that the firm estimated the net forex reserves of Nigeria at $3.7 billion rather than the $33.8 billion published by the CBN.
JP Morgan said this development has reduced the ability and willingness to introduce a flexible exchange rate regime in the near term.
“Owing to a structural balance of payments deficit in Nigeria, and a worse starting point for net FX reserves than previously anticipated, authorities’ ability to transition to a significantly more flexible exchange rate regime is severely hampered,” it explained in the report.
It warned that the process of rebuilding reserve buffers is likely to be delayed as significant reforms are needed to attract foreign direct (and portfolio) investment on a multi-year basis.
It recommended more short-term fixes, which could involve a swift improvement in oil output and a significantly tighter monetary policy, a move that could see the CBN pause hikes from the current 18.50 per cent.
“Authorities will have to increase the frequency of OMO auctions, which resumed last week. In the meantime, we remain on the sidelines, but on the balance of risks, we now believe selling USD/NGN NDFs may be the next trade given the reduced likelihood of further significant near-term FX adjustments.”
Dipo Olowookere