Everyone Is Losing Faith With CBN’s NAFEX Window

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The exchange rate between the naira and dollar fell to as low as N735/$1 last week shortly after the bombshell interest rate hike of 15.5% by the apex bank.

Investors had taken the rate hike as a sign that the central bank saw inflation as a major threat to the naira’s stability. Thus, reducing the money supply was a message to the market that there will be no loose cash for anyone to borrow and utilize for forex speculations.

Barely a week after the announcement, the exchange rate has declined further to N740-N750 to the dollar depending on which market you are buying from. Nigeria’s exchange rate has now declined by 23.6% this year according to Nairametrics analysis.

In fact, since the decline of the naira started in late 2019 from about N360 to the dollar, Nigerians now have to spend twice what it took to buy the same dollar today at N740/$1. Much of these challenges are due to the way Nigeria’s forex market is currently being managed.

With multiple exchange rate windows and a huge disparity between the official and black market rates, Nigerians are fast losing faith in the management of the forex market and this clearly manifested in several ways.

Students, businessmen, and personal travelers seeking forex also brave long waiting lines just to get it at official rates. Some of them who can’t wait seek alternatives in the black market. Most have also lost confidence in the official forex market, resorting to the black market to meet their forex needs.

Young Nigerians are leaving the country in droves so they can earn better and live more productive life. Those who prefer to stay in the country also prefer to work remotely for a foreign company earning in foreign currency. When they earn forex, they ignore the official windows for remitting forex, preferring to use peer 2 peer channels or other alternative channels when remitting.

The broken exchange rate market has also ensured companies with significant dollar earnings or inflows resort to the black market to sell their forex instead of selling on the official Nafex window.

Traders have also lost faith in the official market and its current design and will only sell dollars when there is an absolute need to fund naira-related expenses. When they don’t need to spend, they hold on to their forex jealously for fear of holding on to a fast depreciating currency.

The CBN’s RT 200 which rewards exporters with incentives when they remit through the official channels, is often circumvented by exporters and they claim the difference between the official and black market rates under the table. Nairametrics explained this clearly in this article.

We also see a similar trend with manufacturing companies with foreign affiliations.

Rather than borrow in naira from local banks, most of them approach their parent companies for forex lines essential to funding their import bills. Those without foreign affiliations, simply resort to the black market to source forex since the official market has failed to meet their demand.

Even Nigerian banks that promoted the usage of naira debit cards for paying forex bills have had to roll back this product. From reducing the limits to as low as $100 per month, some have canceled it outrightly. Just as it is with other sectors of the economy, banks have lost confidence in the fx market.

The federal government through the ministry of finance has repeatedly cited the broken forex market as a major bottleneck in attracting foreign investments to the country. A recent Integrated National Financing Framework (INFF) authored by the United Nations and the Ministry of Finance criticized the country’s multiple exchange rate systems as being an obstacle to businesses. “The multiple exchange rate system and limited access to foreign exchange is a significant obstacle for businesses to operate. This exchange rate system and its inherent volatility deter investments in Nigeria.”

The capital importation data published by the National Bureau of Statistics also confirms the observations raised in the report. Capital importation into the country for the first half of this year and the whole of 2021 stood at $9.8 billion compared to $14.5 billion reported in the first two quarters of 2019 alone when the forex market was functional.

Foreign investment in portfolios, a major source of forex for the country has also fallen to as low as $3.3 billion last year from about $16 billion in 2019.

The implication of a lack of confidence in Nigeria’s forex market is that pressure will continue to mount on the exchange rate widening the disparity between the official and black market rate which is now over N300/$1 or 41.3%. The gap will continue to widen until the central bank fixed the broken NAFEX market which it controls.

Source: Nairametrics