The yawning gap in foreign exchange rates between the official Investors’ & Exporters’ window of the Central Bank of Nigeria (CBN) and the parallel market widened on Wednesday as Naira gained at the I&E window but depreciated at the black market, leaving more incentive for round tripping by speculators.
Arbitrage is a term used to describe a situation where one buys dollars at cheaper rate from the official market and turns round to resell at higher rate at the parallel or black market, making a profit based on the differential.
At the CBN official I&E window, the Naira gained 66kobo or 0.159 percent to close at N414.07 to the Dollar on Wednesday, up from N414.73 per $ at Monday’s trading session.
But, at the parallel markets in Lagos, the local currency depreciated by as much as N1 or 0.17 percent to close N573 per $ on Wednesday as against N572 at which it had closed on Monday.
The differentials between official and black market rates stood at N161.93 or 39.1 percent per $ traded by speculators, further stoking the Dollar demand crisis.
This is in spite of significant Dollar liquidity noticeable in the system as turnover improved on the back of appreciable increase in External Reserves.
As at Monday, October 18, Nigeria’s foreign reserve was seen at $40.39billion indicating a $566.45 million increase over $39.82 billion recorded as at close of transactions previous week.
Financial market experts attributed the upsurge in foreign reserve level to the recent FGN Eurobond proceeds of about $4.5billion on the backdrop of rising crude oil prices that firmed up at $84.36 for Bonny Light Crude and $84.24 West Texas Intermediate as of Wednesday, October 20.
Consequently, forex turnover at the official window improved significantly by 94.8 percent on Wednesday, from $172 million recorded on Monday to $334.97 million, according to data from FMDQ.
Commenting on the arbitrage opportunity for speculators, former Director General of the Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, called on the CBN to do away with its rigid exchange regime whereby it fixes a compelling exchange rate for all.
“You cannot compel investors or anybody bringing in Dollars that they must bring it at the official rate which is N412 per Dollar when you have a huge premium between the official and parallel market rates. A premium of over 30 percent? It doesn’t work in any other economy,” Yusuf concluded.
According to him, the Central Bank of Nigeria (CBN) management of foreign exchange has been suppressing supply and incentivising demand which is a direct opposite of what it should rather be doing.
It could be recalled that the issue of the foreign exchange crisis came up at the Mid-term Review of the Current administration during which the Vice-President, Yemi Osinbajo asked the apex bank to review its strategy on foreign exchange for the Naira value to reflect the market reality.
He said the “artificially low rate” deters investors from bringing forex into the country.
“As for the exchange rate, I think we need to move our rates to be as reflective of the market as possible. This, in my own respectful view, is the only way to improve supply,” Osinbajo said.
Osinbajo’s concerns came on the heels of others that have criticised the apex bank’s management of the forex market.
“We can’t get new dollars into the system, where the exchange rate is artificially low. And everyone knows how much our reserves can grow. I’m convinced that the demand management strategy currently being adopted by the CBN needs a rethink, and that is my view” noted the vice-president.
As at then, the Nigerian currency stands at N411 to $1 at the official side of the market, while the Naira goes for about N565 at the parallel market.
“There must be synergy between the fiscal and the monetary authority. We must be able to deal with the synergy, we must handle the synergy between the monetary authority, the CBN, and the fiscal side.
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