Naira Declines as Analyst Fear Roundtripping in Dual Exchange Rate

The value of the naira dropped 1.16 per cent yesterday to N350 to the dollar in anticipation of the modalities of the flexible foreign exchange policy being adopted by the Central Bank of Nigeria (CBN).
The Monetary Policy Committee of the CBN rising from its meeting yesterday announced that the apex bank would be adopting a flexible foreign exchange policy which would be announced in coming days.
Although the naira had declined marginally to N346 to the dollar on Tuesday from N345 to the dollar, it further declined in value to N350 yesterday. Analysts and currency traders say they expect increased dollar inflow into the market in the next few days as the CBN announces the new market guidelines.
The MPC members had voted to introduce greater flexibility in the inter-bank foreign exchange market structure and to retain a small window for critical transactions.
Analysts however say the decision to create a dual exchange rate with the introduction of another exchange rate segment for critical transactions, opens the market to abuse.
An analyst at Ecobank, Olakunle Ezun noted that “as much as the flexible exchange rate policy is good for the economy, the fall out of a dual exchange rate system will not be. This is because it will create room for roundtripping as there are no measures for checkmating it.”
Likewise, analysts at Financial Derivatives company Limited say the real challenge is the introduction of another exchange rate segment for critical transactions. “This ostensibly creates a dual exchange rate which is open to abuse.
“Though an adjustment to the naira will likely have a short-run inflationary impact, we expect increased forex supply and reduced uncertainty will reduce the unintended consequences and the exchange rate pass through effect. In the end, an efficient market structure and a transparent process are likely to keep Nigeria on the real equilibrium exchange rate path (REER).”
FDC analysts also noted that the change in exchange rate policy is also likely to lead to a sharp increase in foreign direct investment as well as foreign portfolio investment and Diaspora flows.
“Nigeria had been starved of international trade and investment flows after sticking dogmatically to a fixed exchange rate policy. In spite of deteriorating terms of trade and a vulnerable trade balance, it refused to change the policy. It instead increased exchange controls by restricting imports of many items.”

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