CBN’s rate for Naira sends false economic signals
Sopuruchi Onwuka, with agency reports
Between the N460 official rate for the dollar and the over N850 in the informal foreign exchange market, market pundits that generate data to simulate the direction of the economy are having hectic time.
Whereas it is traditional in any foreign exchange market for the official rate of the local currency to swing within a value band, the stretch is usually short, predictable and calculable; making it easy to simulate a reliable index on the health of the local economy.
However, in Nigeria everything in the economy is abnormal; including the value range of the Naira. This makes the Naira and the operating economy a difficult case in the Bloomberg’s table for countries whose currency’s contend with the dollar.
According to the economic journal, the Naira is officially doing pretty well this year, down just 4% against a strong US dollar, ahead of the Canadian dollar and the Swiss franc.
“But that exchange rate is used only by the government — ordinary Nigerians are grappling with a 37% drop on the widely-used black market. That makes it one of the world’s worst-performing currencies, after Ghana’s cedi, which is down nearly 55% this year, and the Sri Lankan Rupee. Its peers include Sierra Leone’s leone, which is down 36%, and the Egyptian pound, which has lost 35%,” the journal reported.
Africa’s largest economy operates a tightly controlled official rate but it’s in the parallel market where the exchange rate of the local currency is largely determined by the level of demand for the dollar.
Nigeria’s central bank rations dollars at the official rate, cutting off access to many businesses and individuals, which in turn drives demand to the unauthorized black market. This has led to a widening gap between the managed and parallel markets to more than 90%.
While the naira officially closed at 442.75 to the dollar on Friday, currency traders on the streets of Lagos, Nigeria’s commercial hub, quoted the greenback at 890 naira, according Umar Salisu, a bureau de change operator who tracks the data.
The local unit’s drop in the black market started a day after the central bank announced last week that it will issue redesigned 200-, 500- and 1,000-naira notes from mid-December in a bid to mop up excess cash in circulation.
The Abuja-based regulator gave Nigerians until Jan. 31 to exchange the existing bills for new ones, a tight deadline considering that the central bank estimates that as much as 2.7 trillion naira ($6.1 billion) sits outside bank vaults. Africa’s most populous country has an average of 4.5 bank branches per 100,000 people and 45% of adults don’t have a bank account.
The naira’s slump is likely to continue in the near term given low oil revenue and rising outflows due to uncertainties associated with February’s presidential election, said Uche Uwaleke, a professor of finance and capital markets at the Nasarawa State University in central Nigeria. The dollar is seen as a safe haven, he said.
“It’s evident that a lot of currency substitution is going on as many people now see the greenback as a better store of value,” Uwaleke said.
