Parallel Market Rate at an All-time High of N550

El Passo

Tuesday, September 14, 2021 / 1:46 PM / by CSL Research / Header Image Credit: AZA Finance In recent weeks, severe pressure has been mounting on the exchange rate at the parallel market following the Central Bank of Nigeria’s (CBN) policy stance to discontinue the supply of FX to Bureau De Change Operators […]

Tuesday, September 14,
2021 / 1:46 PM / by CSL Research / Header Image Credit: AZA Finance

In recent weeks, severe pressure has been mounting on
the exchange rate at the parallel market following the Central Bank of
Nigeria’s (CBN) policy stance to discontinue the supply of FX to Bureau De
Change Operators (BDCs). Consequently, the premium between the parallel market
rate and the rate at the Investors & Exporters (I&E) window has
continued to widen. Since the last Monetary Policy Committee (MPC) meeting when
the decision was made, the Naira at the parallel market had depreciated by 8.2%
to NGN550/US$, while the I&E window has remained relatively stable,
currently at NGN412.75/US$. Thus, the parallel market premium had worsened to
33% from 23% when the policy was made on 27 July 2021.

 

While the CBN’s action seems justified based on the
illicit financial behaviour of the BDC operators, we believe the timing of the
ban (summer period: June-August) is inopportune. The summer period is
characterized by pent-up FX demand to meet personal travels and educational
needs. Though the apex bank redirected the FX supply previously meant for the
BDCs to commercial banks, restrictions on FX demand limit placed by the banks
on customers have not changed and stringent requirements to access FX from the
banks can be discouraging for some.

 

As such, customers have resorted to getting FX from
the parallel market, pushing exchange rates to new levels. Besides, with the
current situation, inflows from the Naira 4 Dollar scheme aimed at boosting
liquidity at the parallel market may not have a far-reaching impact. Also, the
inability of FPIs to get FX for repatriation has stalled foreign portfolio
inflows, a major source of dollars into the economy.

 

In our view, we understand that the policy’s aim may
be to trail all FX claims within the market, but this has not helped to ease FX
demand pressures. In 2016, when the CBN took a similar action, it yielded
limited results, as the parallel market premium was estimated at 61% as of
year-end. That said, we expect liquidity from the planned Eurobond issuance of
US$3.0bn and Special Drawing Rights (SDR) of US$3.4bn to increase FX liquidity.
Thus, we do not expect a devaluation this year.

 

Proshare Nigeria Pvt. Ltd.

 

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Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

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