Experts advocate managed float system to tackle FX volatility

By Omeiza Bilal with agency

The recent decline in the Naira’s value across official and parallel markets has prompted suggestions from financial experts to mitigate currency volatility and prevent further depreciation.

The naira recovered slightly on Wednesday as the local currency appreciated to N1542.58/$1, data from the Nigerian Autonomous Foreign Exchange Market (NAFEM) window where the foreign exchange is traded officially has shown.

This represents a gain of 8.66 in the local currency compared to the N1,551.24/$1 it closed on Tuesday.

However, the naira was in a riotous mode at the parallel market, where forex is unofficially traded, with the exchange rate in a yoyo mode before settling at N1,900/$1, as against the N1,825 rate it closed at the previous official trading day on Monday. This represents a loss of N75 in the local currency.

The naira also shed a further N50 against the British Pound to trade at N2,260/£1 as against the N2,210/£1 it traded the previous trading day.

The CBN had announced a series of measures aimed at enhancing transparency and stability in the foreign exchange market while addressing malpractices.

However, while the analysts acknowledge the positive aspects of the CBN’s recent policies aimed at managing pressures in the foreign exchange market, they highlight that these measures fail to directly address the fundamental issue of limited supply.

The analyst advocates for shifting towards a managed float system to allow flexibility in implementing initiatives to bolster foreign exchange reserves, such as boosting oil production, enhancing agricultural exports, and incentivizing foreign remittances.

Financial analysts at FSL Securities Limited expressed concerns regarding the recent liberalization of the foreign exchange market by the Central Bank of Nigeria (CBN).

Mr. Victor Chiazor, Head of Research and Investment, FSL Securities Limited, believes that the CBN was hasty in their decision to liberalise the foreign exchange market.

Chiazor noted that the CBN’s approach lacked comprehensive consideration of the market’s dynamics, particularly in light of the persistent low supply.

He highlighted that while recent policies implemented by the CBN aimed to alleviate pressures in the FX market, they failed to effectively address underlying supply constraints.

Professor Uche Uwaleke, Nigerian First Professor of Capital Market and the Director of the Institute of Capital Market Studies at the Nasarawa State University Keffi who voiced concerns regarding the current state of the exchange rate.

He highlighted that the increasing FAAC (Federal Account Allocation Committee) receipts are partially accountable for this situation.

Uwaleke emphasized the importance of legislative action in this regard, advocating for the Executive to propose a Bill for a “By-Nigerian Law” and commit to enforcing its provisions.

Also, in an interview, Mr. David Adonri, Executive Vice Chairman of Hicap Securities Limited, attributed the current volatility and depreciation of the currency to a significant supply-demand imbalance.

Adonri emphasized that bridging the supply gap hinges on increasing crude oil exports to meet OPEC quotas and cater to domestic refinery demands.

He cautioned against the overuse of monetary policy tools, noting their diminishing effectiveness in curbing demand pressures for foreign currency.