Finance

Anxiety in FX market over FG’s liberalisation policy

Nigeria’s FX convergence journey hits brickwall

Days of defending the naira are over as the Central Bank of Nigeria (CBN) may gave given commercial banks and other authorised dealers the nod to sell foreign exchange at market-determined rates.

This move is consistent with President Bola Ahmed Tinubu’s promise to ditch the multiple exchange rate and achieve some sort of convergence between the official and parallel markets.

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Competent market sources, say the new arrangement means naira has been officially allowed to float to reflect market realities.

Contacts at the Central Bank of Nigeria (CBN) promised to revert once done at a meeting, but data from the FMDQ to further illuminate the matter is expected later in the day.

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Meanwhile, experts have reacted to the development and called for caution in the sudden floating of the naira.

Prof Uche Uwaleke, Nigeria’s first professor of the capital markets, told Daily Sun said that the unification of exchange rates will make for more transparency in the  forex market.

“But I think that the CBN should implement that in a way that does not cause massive distortions in general price level.

“In this regard, a sudden free float of the naira is not advised given that the economic fundamentals required to support a naira float are still very weak especially in relation to sources of forex. “It’s rather early to bank on sustainable capital inflows from foreign direct investments due in part to insecurity and the overall unconducive environment of doing business in Nigeria.

“This sudden naira devaluation may draw foreign portfolio investments which is part of the reason the stock market is surging.

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“But we also know that portfolio investments are hot money and do not represent a sustainable source of forex inflows. “In consideration of this therefore,  I would advise that the unification of exchange rates should not be a one step process but should be implemented over a period of time however short it may be.

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“Empirical evidence suggest that reforms are more successful when they are sequenced and implemented in phases. This is against the backdrop of the oil subsidy removal which, taken together, can result in galloping inflation and rising poverty level.

“So, while fiscal and monetary policy reforms are welcome, absolute care should be taken to strike the right balance and minimize their unintended consequences.

Floating the naira comes after years of defending the naira, a stance threw up varied reactions from stakeholders.

Sunnews

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