What it Means For You as CBN Devalues Naira on I&E Window

The Central Bank of Nigeria (CBN) is now allowing banks to freely trade Foreign Exchange (FX) on the Investors and Exporters FX Window, by removing the previous cap, effectively devaluing the Naira.

The removal of the previous cap set by the CBN has enabled the naira find a market level against the dollar based on the forces of demand and supply, with the currency adjusting lower to around 755 naira per dollar in today’s trading, according to data from the FMDQ.

What it means for you

• This development means buyers and sellers of foreign currency (participants in the I&E window, including banks, exporters and investors) are now allowed to quote rates they find comfortable in the FX market.
• It is against the previous regime where rates are purely based on CBN comfort levels and indeed CBN was a major buyer/seller in the I&E window and often dictated price/rate.
• Analysts say hopefully, as the market attracts more supply of FX from investors and exporters and speculative demand eases, the CBN would evolve guidance for quotes around a guided band of say +/-3% of the new equilibrium exchange rate level like Nigeria used to have during the days of rDAS.
• Given that this new rate in the official market is same as parallel market, there is no incentive for people and businesses with genuine transactions to patronize the parallel market, hence FX trading activity in the parallel market will slow down significantly.
• Subsequently, the official market should attracts more FX supply and rate should gradually  ease in the I&E window, and such would cause rates in the parallel market to also ease.
• Whilst initial knee jack reaction may cause FX rate to go as high as about N800/USD, analysts expect it to steadily appreciate back towards N600 levels (our view), especially if Nigeria can save some FX utilization on unscrupulous petrol imports bills whilst also gaining more FX flows from increase oil exports and renewed inflow of foreign direct investment and foreign portfolio investment.
• Hopefully, these dynamics strengthens the Naira towards our expectations.
• In addition, this development should give the monetary policy authority the opportunity to ease interest rate, which of course would help to reduce the cost of capital for businesses, many of which hitherto noted they were sourcing the bulk of their FX need at parallel market rate.