Of CBN Policy Changes and Value of Naira

Nume Ekeghe writes on the recent fluctuation in the value of the naira at the parallel and official market and expected journey towards convergence

The recent developments in Nigeria’s naira exchange rate have presented a riveting story, unfolding over the past week. As we delve deeper into this intriguing narrative, we must also explore the profound implications of the Central Bank of Nigeria’s (CBN) decision to lift restrictions on 43 specific items. This policy shift, analysts believe, is poised to reshape the dynamics of the Nigerian foreign exchange market and holds the potential to significantly influence the country’s economic trajectory.

Lifting Restrictions on 43 Items

On October 12, 2023, the CBN announced the momentous decision to eliminate long-standing foreign exchange restrictions that had been imposed on the importation of 43 specific items. Notably, this policy change came almost nine years after the CBN, under the leadership of former Governor Godwin Emefiele, first implemented these restrictions. The initial objective was to conserve scarce foreign exchange resources and promote local production of the restricted items. But the decision by the new readership of the CBN to reverse the policy has had a ripple effect on the value of the naira. But other stakeholders like importers and exporters have hailed the new policy. However, while importers were celebrating, the naira took a beaten reaching an all time low on October 23^rd.

Naira’s Historic Low

The week began with the Naira reaching an all-time low of N1,210/$1 in the parallel market, while the official Investors & Exporters (I&E) window closed at N793.34/$1. This substantial divergence between the official and parallel markets significantly widened the arbitrage gap to N416 per dollar. The Naira was under immense pressure in both markets, reflecting the complexities of managing foreign exchange in Nigeria.

A Steep Descent

Things took a different turn as the Naira’s challenging journey continued as it depreciated by N100 in a single day in the parallel market, where it was traded at N1,310/$1. Simultaneously, the official I&E window experienced depreciation, closing at N847.77/$1. This divergence between official and parallel rates further widened the arbitrage gap to N462 per dollar. It was becoming evident that the foreign exchange landscape in Nigeria was in a state of flux.

Uphill Battle

The Naira’s downward slide showed no signs of abating the next day as it reached N1,315/$1 in the parallel market. However, there was a glimmer of hope as the official I&E window recorded marginal appreciation, closing at N801.10/$1. Nevertheless, the widening arbitrage gap, which now stood at N514 per dollar, underscored the challenges in maintaining exchange rate stability.

Signs of Recovery

For the first time in two weeks, on October 26, 2023, the Naira demonstrated resilience in the parallel market, trading at N1,300/$1. The official I&E window, however, depreciated to N837.49/$1. This modest recovery hinted at the potential for convergence between official and parallel market rates, with the arbitrage gap narrowing from N514 to N463 per dollar.

A Glimpse of Stability

The next two days were however different as the naira’s trajectory took an encouraging turn as it appreciated for two consecutive days in the parallel market, reaching N1,230/$1. Concurrently, the official I&E window displayed strength, closing the day at N789.94/$1. The narrowing arbitrage gap was an optimistic signal for the currency market.

Towards Convergence

The Naira continued its upward momentum on October 30, appreciating for five consecutive days in the parallel market, closing at N1,110/$1. Nevertheless, the official I&E window saw depreciation, closing at N993.82/$1. This remarkable gain in the parallel market indicated potential convergence, with the arbitrage gap further reducing to N117 per dollar.

Economic Implications

Meanwhile, analysts believe the CBN’s decision to lift restrictions on the 43 items is poised to have profound implications for the Nigerian economy.

“This policy change is expected to enhance the effectiveness of monetary policy tools and create a unified and well-functioning foreign exchange market, aligning with the CBN’s core functions and mandates, “said a market watcher who do not want his name in print.

“The “Willing Buyer – Willing Seller” system, which the CBN aims to implement, will allow exchange rates to adjust naturally, fostering market clearing and consistency. This is instrumental in addressing the widening gap between official and parallel market rates.

“Moreover, the removal of restrictions on the 43 items is anticipated to benefit local production by making imported inputs more affordable. This is expected to lead to the production of more competitively priced retail products and contribute to improving living standards. The policy is conducive to a unified foreign exchange market and is predicted to have a positive impact on inflation, fostering a more stable economic environment, “the analyst said.

In conclusion, the intertwining narratives of the naira’s exchange rate journey and the CBN’s policy shifts highlight the intricate relationship between exchange rates and economic policies. As the naira’s voyage continues, the significance of these policy decisions will become increasingly evident in shaping Nigeria’s economic landscape. The week’s exchange rate fluctuations have indeed been a fascinating chapter in the ongoing story of the Nigerian naira.