Cape Town - Nigeria’s latest attempt to ease the dollar
shortage choking its economy is dependent on traders trusting the central bank.
The monetary authority opened a foreign-exchange window
for investors and exporters Monday where the naira trades between the interbank
rate and the black-market rate, which many Nigerians use to access dollars. In
the weeks before the opening, Governor Godwin Emefiele told senior bankers that
he would tolerate a weaker naira and allow the market to determine the rate
within the new window, according to a person who attended the meetings.
While the initial market reaction showed investors are
optimistic the platform will be successful in bringing hard currency into
Nigeria -- bank stocks rose and naira forward contracts priced in a weaker
currency - policy makers still must demonstrate that they’ll allow free
trading. Investors have been disappointed before.
Last June, the central bank ended a 16-month currency-peg
and promised to float the naira, but it has traded near 315 per dollar since
August. That’s about 25 percent stronger than its black-market price of 390.
“If this is going to be market-determined, that would be
a great positive,” said Razia Khan, the chief Africa economist at Standard
Chartered in London. “Given the false start we had in June last year, there’ll
be a certain amount of caution initially.”
Read also: Nigeria naira firms
Standard Bank Group analysts expect an initial “sharp but
unsustainable” decline in the naira as investors and companies try to clear
their unmet demand for dollars of about $4 billion. If that happens, the
central bank may start manipulating the rate again, which would discourage
inflows.
“What is on paper may not actually be what is practiced,”
Standard Bank’s Lagos-based Ayomide Mejabi and Phumelele Mbiyo in Johannesburg
said in a note Monday.
What’s happened?
Unlike Egypt, which floated its pound in November when it
was also desperate for hard currency, Nigeria’s central bank has introduced
multiple exchange rates and sold forward contracts to meet demand for dollars.
But those measures haven’t diminished the need for a black market to buy the
greenback.
The central bank says the separate window will help
“deepen the foreign exchange market and accommodate all foreign-exchange
obligations.” Those allowed to sell dollars include include portfolio
investors, exporters, banks and the regulator itself. Though trades are meant
to be done on a willing-buyer, willing-seller basis, the central bank says it
can intervene.
The FMDQ OTC Securities Exchange, a Lagos-based trading
platform, will publish daily rates based on a poll of banks, with Monday’s
closing rate set at 377.1 per dollar.
Why did the
Central Bank do this?
Nigeria has suffered from a dearth of foreign exchange
since the price of oil, its main export, plunged in 2014. The central bank’s
imposition of capital controls and a currency peg only worsened the crisis,
according to investors, who have pulled money out of the country in the past
two years. The government and central bank need them back to revive the
economy, which shrank last year for the first time since 1991.
“There was acknowledgment from policy makers that greater
flexibility in the FX regime was needed and that the existing system was
hurting growth,” Khan said.
Will it work?
Traders would prefer Emefiele to free the existing
interbank market rather than create a separate exchange rate. But JPMorgan
Asset Management says investors may be enticed into the market if they’re
confident there’s enough liquidity for them to exit.
“It’s early days to gauge how effective the new window
will be,” Diana Kiluta, an emerging markets debt portfolio manager at JPMorgan
Asset Management in London, said in an emailed response to questions. “If
indeed foreign investor flows can consistently clear in the window and there is
some transparency around price determination, this could begin to restore some
confidence.”
What are the dangers?
Nigeria’s President Muhammadu Buhari and Emefiele have
consistently criticized those calling for a weaker naira, saying it would only
accelerate inflation already at 17 percent and hurt the poor. That’s fuelling
investor scepticism that the central bank will allow a true float within the
window.
Another danger is that it’s unclear whether oil
companies, which generate the bulk of Nigeria’s export earnings, will be able
to sell dollars in the window. Without them, the central bank may be left as
the main supplier until foreign investors return.
“There are a number of things that need clarification,”
Khan said.