THE move by the Central Bank of Nigeria (CBN) to grant banks authority to determine their own foreign exchange (fx) trading rates has shaken the financial markets.

Analysts believe the move strongly indicates the devaluation of the Nigerian naira and its vulnerability to market forces. The announcement led to intense volatility in the fx markets, with naira quotes ranging from US$1:₦470 to ₦755.

FBN Quest believes depending on where rates eventually settle, the move
could potentially narrow or eliminate the arbitrage gap of roughly ₦300/$ that prevailed between the official and parallel market rates.

“Consequently, a key benefit of the policy is the elimination of losses resulting from the arbitrage spread, which could help alleviate pressure on the gross official reserves,” FBN Quest stated.

Provisional data from the CBN shows that the regulatory bank’s total fx sales through its official windows amounted to almost $15,3 billion in 2022, resulting in an estimated opportunity cost of approximately ₦4,6 trillion.

Additionally, Nigeria’s heavy dependence on imports suggests a likely surge in inflation due to higher prices for imported goods.

“Notably, the recent removal of subsidies on premium motor spirit (petrol) will result in even higher pump prices going forward,” FBN Quest stated.

It noted as such, manufacturing firms which were heavily dependent on
imports raw materials and machinery will experience challenges, including pressure on operating and profit margins and increased interest expenses from fx-denominated debt.

“However, it is worth noting that a counter argument is that many manufacturers already obtain a substantial portion of their FX needs
from the black market.”

A significant fiscal benefit is the projected increase in revenue disbursements to the federal, state, and local governments as a result of the higher exchange rate applied to convert oil revenue proceeds.

However, a negative implication is the potential rise in the naira value of governments’ external debt stock and by extension the debt service burden.

Nigeria’s external debt stock totaled $41,7 billion as of the end 2022.

FBN Quest forecast the fx market to remain highly volatile in the near term as market participants actively seek to determine price levels.

“While initial euphoria may be seen in the equity and debt markets, medium-term volatility is anticipated based on the implications for companies’ earnings performance.”

The administration of the new president, Bola Tinubu, faces an uphill task reviving Africa’s largest economy.

– CAJ News