Evolution Not Revolution in FX Thinking

By FBNQuest Analysts

Our simple chart is almost symmetrical and neatly conveys the recurring challenges at the heart of exchange-rate policy. Between June 2017 and February 2020 fx was freely available. The differential between the official/interbank rate and that at the bureaux de change was constant.

Up to May 2017 and since March this year, fx has been in short supply and the spread considerably wider. The turbulence either side of the period of calm reflects pressure on the balance-of-payments and reserves.

As the sequence of events has repeated itself so we are guilty of the same in that our analysis is consistent.

Calm returned in June 2017 because of the return of foreign portfolio investors (FPIs) in large numbers. The oil price did not reach US$70/b until March 2018.

The CBN and FGN now find themselves in dangerous territory for two reasons. While the oil price has settled above US$40/b for two months, Nigeria must make large production cuts in line with OPEC quotas. Second, a new influx of FPIs would be a surprise, given that existing investors have been waiting since March for the repatriation of earlier sale proceeds.

The FGN is in talks with the World Bank over budget deficit financing of US$1.5bn. It could well be that the Bank is pushing for fx reform. The CBN has been moving towards unification of rates since March but at its own pace.

If the Bank was to disburse, the CBN might briefly supply the investors’ and exporters’ (I&E) window to reduce the backlog of payments. Our hunch is that the I&E rate will be around N410 at end-year, noting that the CBN has shown some flexibility in its market intervention sales for retail.

Rather than a chase after said fair value, we see small rate adjustments and administrative measures by the CBN. This is our conclusion based upon analysis of the institution, its policy statements and high-profile speeches.