The Central Bank Of Nigeria opened a foreign-exchange window for investors and exporters on Monday where the naira trades between the interbank rate and the black-market rate, which many Nigerians use to access dollars. Nigeria’s latest attempt to ease the dollar shortage choking its economy is dependent on traders trusting the central bank itself.
Traders would prefer Emefiele to free the existing interbank market rather than create a separate exchange rate. There is investor scepticism that the central bank will allow a true float within the window.
The central bank says the separate window will help “deepen the foreign exchange market and accommodate all foreign-exchange obligations”. Those allowed to sell dollars include portfolio investors, exporters, banks and the regulator itself.
The FMDQ OTC Securities Exchange, a Lagos-based trading platform, will publish daily rates based on a poll of banks, with Monday’s closing rate set at 377.1 naira per dollar.
An over-the-counter (OTC) market and an exchange market are the two basic ways of organizing financial markets. In an OTC market, dealers act as market makers by quoting prices at which they will buy and sell a security or currency. A trade can be executed between two participants in an OTC market without others being aware of the price at which the transaction was effected.
In general, OTC markets are therefore less transparent than exchanges and are also subject to fewer regulations. Though trades are meant to be done on a willing-buyer, willing-seller basis, the CBN says it can intervene.
In the weeks before the opening, Governor Godwin Emefiele told senior bankers that he would tolerate a weaker naira and allow the market to determine the rate within the new window.
While the initial market reaction showed investors are optimistic the platform will be successful in bringing hard currency into Nigeria – bank stocks rose and naira forward contracts priced in a weaker currency – policymakers must still demonstrate that they’ll allow free trading. Investors have been disappointed before.
Last June, the central bank ended a 16-month currency-peg and promised to float the naira, but it has traded near 315 per dollar since August – about 25 percent stronger than its black-market price of 390.
Unlike Egypt, which floated its pound in November when it was also desperate for hard currency, Nigeria’s central bank has introduced multiple exchange rates and sold forward contracts to meet the demand for dollars. But those measures have not diminished the need for a black market to buy the greenback.
Nigeria has suffered from a dearth of foreign exchange since the price of oil, its main export, plunged in 2014. The central bank’s imposition of capital controls and a currency peg only worsened the situation, according to investors, who have pulled money out of the country in the past two years. The government and central bank need them back to revive the economy, which shrank last year for the first time since 1991.
Nigeria’s President Muhammadu Buhari and Emefiele have consistently criticised those calling for a weaker naira, saying it would only accelerate inflation already at 17 percent and hurt the poor.