Naira Breaks 3 year Jinx, Gains 12% in 4 Days.

The value of the naira recorded the highest and fastest gain of 11.9 per cent in four days at the parallel market  in over three years last week as the Central Bank of Nigeria (CBN) sold a total of $372.4 million to ease the pressure on the local currency.

Naira which rose to an all time high of N522 to the dollar last week Monday had gained N62 by the weekend to sell at N460 to the greenback. The apex bank had sold $370.9 million dollars on Tuesday and another $1.5 million on Thursday, sending the value of the naira up.

Chief executive of Financial Derivatives Company Limited, Bismarck Rewane said he expects the CBN to commit itself to a regular and predictable supply of dollars to the forex spot market in March in furtherance to its forex sales last week.





This he said will lead to a rapid convergence of rates and a gradual end to multiple exchange rates (MER) and forex abuse. The gap between the parallel and interbank market rates had widened to N217 before the new policy implementation and had been cut down to N155 by the end of last week.

The CBN had on Monday last week issued a new foreign exchange policy to increase forex allocations to retail end users while reducing the demand pressures in the parallel market.

The new policy focused on direct additional funding to banks in order to shore up forex liquidity to address customer needs with regards to Personal and Business Travel Allowances, Medical needs as well as school fees.

It also reduced the maximum tenor of forward sales from 108 days to 60 days. The CBN last week held two successive 60-Day forex forwards sales totaling $600 million. However, the sale of dollars by the CBN had mopped up naira liquidity in the financial market as overnight interbank lending rates spiked to above 200 per cent, intraday during the week.

Overnight lending rates among banks closed on Thursday at 117.5833 per cent before improved liquidity eased the rates to 18.875 per cent in Friday. Banks scrambled for naira liquidity to position at the auctions as called for bids from retail end-users in preparation for the first PTA/School Fees auction.

Although the implementation of the revised forex market guideline has been greeted with much optimism, especially as the value of the naira rose, analysts said they do not believe the policy will fully address the liquidity of challenges in the market.

While they are optimistic that the naira may not breach the N500 mark in the short to medium term, they say pressure on the naira will continue as the CBN refuses to lift the forex ban on the 41 items at the interbank market.

Analysts at Afrinvest Limited said they do not believe the new forex policy can sustainably address the lingering forex liquidity challenges in the economy without relaxing forex rate peg and review of list of items ineligible for forex transactions in the parallel market.

“Personal and Business travel allowances, school fees and medical fees have been estimated to account for less than 20 per cent of total forex demand in the country hence there is still a large volume of demand (particularly the 41 ineligible items) that could pressure rate at the parallel market.”

“Our medium term conviction remains that maintaining the interbank rate at current peg (without implementing deeper reforms required) will lead to deterioration in current account as more demand surfaces. Hence, there is still a need to address the forex liquidity challenge appropriately and we reaffirm our view that increased flexibility will be needed in order to allow restore investor confidence and boost autonomous forex supply.”


source: Leadershipng.