International credit rating agency, Moody’s Investors Service, has explained that merging the naira’s various rates anytime soon may weaken the currency and raise fuel prices, which will accelerate inflation.
Nigeria’s central bank introduced the current multiple foreign exchange policy in mid-2016 to cushion the effect of foreign exchange scarcity after the 2014 crash in oil prices.
The rating agency said the country will probably maintain its multiple foreign exchange regime until early 2020.
According to Aurelien Mali, an independent analyst with Moody’s, “if the government merges the exchange rates, they won’t be able to provide discounted dollars to oil marketers.”
“It means that they will either have to increase pump prices or give subsidies to marketers, which would negatively impact public finances. Neither option is credible at the moment.”
Nigeria’s multiple Naira rates structure is thus:
- The official rate which is also known as the CBN peg price remains at N305 per dollar since the devaluation in 2016.
- Nigerian Autonomous Foreign Exchange – NAFEX rate – for importer and exporter market segment of the forex market, the rate currently holds steady at N360 per dollar
- Nigeria Interbank Foreign Exchange – NIFEX window – the CBN rate and auction windows that CBN use as a guide to supply dollars to banks and other companies depending on the sector and purpose.
Aurelien Mali said it is unclear how the central bank will try to unify the naira but he expects that monetary officials to continue to manage instead of floating it.
“The jury’s out on whether it will be 305 or 360,” he said. “For the real economy, the rate is already 360. That’s what many exporters, importers and manufacturers have to use. It’s the de facto exchange rate.”
On the part of the International Monetary Fund (IMF), in its Article IV consultation on Nigeria which was released on Wednesday, March 7, 2018, called for a ‘greater’ exchange rate flexibility on a more permanent basis to shield the economy from external shocks and improve trade competitiveness
The IMF said the existence of multiple exchange rates creates distortions in the economy and discourages foreign investment.