Exchange Rate Adjustment – IEFX Rate Devalued Briefly Before Appreciating

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The Central Bank of Nigeria (CBN) devalued the naira by 3.90% to N410.25/$ at the Investors and Exporters window (IEFX) on Thursday December 31st. This is the third exchange rate adjustment in 2020, triggered by the plunge in oil prices, which negatively affected Nigeria’s forex receipts. Crude oil and gas exports account for over 90% of Nigeria’s forex earnings. The rate has since appreciated to N393.83/$

The World Bank and the IMF have recently stepped up calls on Nigeria to accelerate currency reforms which include unifying multiple exchange rates around the IEFX window and gradually shifting to a market-determined exchange rate mechanism. According to the IMF, a unified and flexible exchange rate should ease external imbalances and achieve economic growth. A change of foreign exchange policies was also a major conditionality for the World Bank to approve a $1.5bn loan to the Nigerian government.

The CBN also recently re-introduced some foreign exchange rules to prop up the naira. These include the payment of remittances in dollars to beneficiaries by international money transfer operators. This has boosted dollar liquidity and eased forex pressures in the parallel market.

The adjustment will mop up liquidity from the system and push up interbank interest rates as a significant part of forex transactions are carried out at the IEFX window. Import costs are also expected to rise, further fuelling imported inflation.

In view of the adjustment, we expect to see a further convergence of the multiple exchange rates towards the IEFX window. Given that the premium between the IEFX and the parallel market rates is currently at about N60, it is also likely that another devaluation is on the cards in the coming months.

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