Market News

The bank calls for a more predictable forex management system in Nigeria.

By  Oladeinde Olawoyin

The World Bank has called on the Nigerian government to create the environment for a more predictable foreign exchange management system.

The bank said the Central Bank of Nigeria’s management of the foreign exchange regime was a fundamental cause of the nation’s foreign exchange crisis.

In its bi-annual Nigerian Development Update, the bank said the way the exchange rate was managed limited access to foreign exchange and thus adversely affected investor confidence and investment appetite.

“Significant spreads between the official, the IEFX, and the parallel exchange rate persisted throughout 2020 and as of April 2021, the spread between the official and the IEFX rate was estimated at 8% and between the IEFX and the parallel rate, reached 18% (the spread between the official and the parallel rate was 27%),” the World Bank added.

Nigeria’s foreign exchange policy has been riddled with uncertainties in recent time, owing largely to policy incoherence on the parts of different officials of government.

The Central Bank of Nigeria had last month adopted the Nafex rate as the government’s official exchange rate for the naira, effectively devaluing the currency by 7.6 per cent.

The bank also introduced a naira-for-dollar scheme to boost remittance inflows.

In its report, however, the World Bank noted the “two-month naira-for-dollars scheme introduced by the CBN in March 2021 to serve as an incentive for increased remittance inflows through formal channels was extended indefinitely in May and was preceded by regulatory directives in December 2020—that mandated all licensed operators to pay remittances in dollars.”

The bank said that while the scheme may indeed encourage the use of the formal channels, “it is not clear that incentive payments will increase remittances to the country.”

The World Bank also called on the CBN to allow the I&E FX market function properly by allowing a more market-friendly approach for exchange rate transaction.

“While the CBN has taken steps towards operationalizing unification of exchange rates, greater flexibility will be necessary to support the recovery,” it said.

“Until oil companies are allowed to sell FX receipts to IEFX bank participants, CBN would still have an important role to play as supplier of FX.

“In this scenario, participating banks in the FX market will start to play an expanded role that goes beyond just executing buy/sell orders of its clients to start acting as market makers, meaning that they start to quote two-way prices buying and selling on its own behalf and carrying a stock of FX. With increased flexibility, the CBN could start intervening only to smooth large fluctuations and work toward ensuring a single, market-driven rate.”

The bank added that keeping market stakeholders fully informed of such efforts would help attract both domestic and foreign investment.

“The right mix of exchange-rate flexibility and expanded supply (e.g., through banks and FX agents) would enable the FX market to efficiently allocate resources, which would allow the CBN to focus its interventions on smoothing large and disruptive FX fluctuations,” the bank said.