The former Emir of Kano and former Governor, Central Bank of Nigeria (CBN) Muhammad Sanusi II, has advised the Central Bank of Nigeria CBN to increase the funding of Bureaux De Change (BDC) segment of the forex market to strengthen the naira exchange rate. Sanusi said that the proper funding of BDCs will help bridge the rising gaps between official and parallel market rates. The apex bank had in March suspended dollar sales to BDCs, a practice that pushed large part of the forex demand to the parallel market, where naira is exchanging at N475 to dollar. At the official market, the naira has been devalued to N379 to dollar. Sanusi said this in a webinar organised by AZA, a cross-border payments platforms and forex trading firm, on the theme: United States of Naira: What Price for Unification?, said there has been huge gaps between the official rate, the the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) and the BDC rates since 2016.
He said “I think what the Central Bank is trying to do is breach that gap and I think moves have been made in general in July that have brought the CBN rate and the NAFEX rates closer. But the BDC rates remain an outlier. It is a small percentage of the market, but it does have an impact on speculation, which is why it is important to fund that market,” he said. And once the Central Bank has enough money and funds that market, it will probably converge. So, I would not be interested in moving the rates towards N470, for example, but I would like to see a convergence of CBN and NAFEX, which will take care of over 90 per cent of the transactions in the market and there is some small funding for BDC rate to bring it back to that level,” he said. Sanusi said the CBN had always been guided in the definition of unification by the International Monetary Fund (IMF) position, which is that a multiple currency environment is one where the difference between the rates exceeds five per cent. He said the apex bank has therefore always tried to keep the gap between the official rate, the Automated Teller Machine (ATM) bank rate and even BDC rates to within that range, usually about three per cent.
Continuing, the former CBN boss, said the apex bank is already moving towards unified exchange rate regime. “It is what the IMF and the World Bank have asked for. It makes for positive transparency, it makes for clarity of direction. It also reduces the speculative demand for naira. For me, this is the Central Bank finally saying, basically, we will do what the market has been asking for,” he added. Also speaking, West Africa Banks Analyst at Tellimer, Nkemdilim Nwadialor, said Nigeria seems to be facing liquidity gap in the forex market and that has undeniably contributed to how far all the markets are shrinking. “I believe that unification is long overdue; it is much needed. It is a no brainer at this point. But what I would like to point out is that CBN has not yet released any framework or overview around how it plans to unify. We still do not have a concrete basis for understanding what is happening to bring about unification. There is a lot of talk and there is a lot of possibility that unification will come through. However, in terms of actionable steps, plans or policy layout, we have not seen that from the CBN and so we ca not speak very confidently on where we think post-unification rates should be,” she said.
In his response, Sanusi said he has a lot of sympathy for the Central Bank at this moment. “There are lots of the shocks the Central Bank has no control over. It would be a brave governor of the Central Bank who would announce a target rate when he does not know how much is going to come in or what is going to happen to the oil price tomorrow or the day after, and the entire world is going through shocks. I think it is extremely important that we recognise that the only clarity that the Central Bank can give at the moment is to say we do plan to converge, and that means the official rate is going to be devalued, but we are not going to do it in a rapid and disorderly manner,” he said. He said there are about $4 billion portfolio investors’ cash on the waitlist of the CBN for repatriation, but suggested that if the portfolio investors want to take their money out at any price, they could take a huge devaluation and take a hit.
“But if they want to preserve the value of their currency, there is some virtue in waiting for an orderly unwinding of these backlogs because we must remember that when Covid-19 hit and after the Russia-Saudi fiasco, oil prices went down to $10 a barrel. So, you can either take a huge hit today and buy dollars for N500, N600, or wait a few weeks for oil prices to stabilise and have the Central Bank give you your money at a relatively good rate,” he advised. “So, I think what the governor is trying to do is accept the reality that the value of the Naira today may probably be overvalued somewhat and we need to go through some really effective exchange rate devaluation but also do that in a gradual manner so as to minimise a shock to the economy”.
