A new note coming out of Tellimer Research pours cold water on the Central Bank of Nigeria’s (CBN) latest bout of devaluation, adding that it is unlikely to have much of an impact.
The official naira exchange rate was reportedly devalued on Friday 14 May, converging with the Investors’ & Exporters’ (I&E, or Nafex) rate near NGN 410/US$ from the previous rate of 380/US$.
The note penned by Senior economist at Tellimer research Patrick Curran says the devaluation is flawed because the Nafex rate (which is the relevant market rate) still stays pegged at an overvalued rate of 410/US$.
“So while unification of the official and Nafex exchange rates would help simplify Nigeria’s convoluted FX regime at the margins, and could provide a slight boost to the government’s oil revenue (we estimate c0.2% of GDP at an oil price of US$65/bbl), the real impact on Nigeria’s economy is likely to be extremely limited,” Curran said in the May 18 note.
“In addition, the renewed bout of confusion surrounding the status of Nigeria’s official exchange rate is yet another potent illustration of the ineptitude with which the CBN has handled changes to Nigeria’s FX regime, sowing unnecessary confusion by flipflopping and failing to clearly communicate what amounts to mere cosmetic changes.”
The CBN has continued to try to control exchange rate pressure via administrative measures, including the indefinite extension of the CBN’s “Naira 4 Dollar Scheme”, which offers a 5 naira incentive for every dollar received as a remittance inflow through licensed international money transfers operators.
However Tellimer says remittances will likely remain subdued given the large gap between the parallel and official exchange rates, which makes it far more lucrative to send money through unofficial channels.
Official data points to a c28 percent (cUS$6.6bn) decline in remittances in 2020, which corresponded with a cUS$16bn swing in net errors and omissions from an outflow of US$4.1bn in 2019 to an inflow of US$11.9bn in 2020, pointing to a mass shift towards unofficial channels for remittances and other FX inflows.
World Bank data points to a further 75 percent decline in Q1, which encompasses the first 26 days of the Naira 4 Dollar Scheme and seems to point to a lack of efficacy thus far.
Other CBN policies have included a ban on crypto exchanges, the addition of wheat and sugar to the list of imports banned from accessing FX from official channels, and continued calls from the CBN and Governor Emefiele for exporters to repatriate their export proceeds.
“As usual, these policies fail to address the underlying problem of an overvalued exchange rate and lack of FX supply, instead doubling down on failed policies of capital controls and import substitution,” Curran said in the scathing note.
“Recent changes will do little to address the lack of FX supply and liquidity, with volume on the I&E window remaining subdued. Official reserves have stayed relatively stable this year, giving the CBN some room for further intervention, but FX supply will remain limited without more exchange rate flexibility and we do not see anything to suggest that the CBN will be willing to adopt a more flexible exchange rate regime (a sentiment that was confirmed by our meeting with the IMF last month).”
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