The deputy governor of the Central Bank of Nigeria says that he is happy with this year’s opening of the country’s foreign exchange, even though the IMF highlighted that the system would “weigh on [economic] activity in the medium term”.
Nigeria set up an FX window for buying and selling the naira in April, allowing investors to trade the currency. This prompted a devaluation. But it maintains a multiple exchange rate system whereby certain players in the economy can access hard currency at cheaper rates.
“We have done a good job and the rate depends on the market now,” Okwu Joseph Nnanna, deputy governor at the central bank, told GlobalMarkets. “There should be no more complaints about the flexibility of the market.”
Nnanna said that the bank had had flows of more than $10bn in the window since it opened, and shrugged off criticism of the system.
“What else can an investor look for? It is a totally transparent market,” he said.
Although it is a positive first step, the liberalisation of the FX market needed to go further, the IMF said in its latest World Economic Outlook.
“Concerns about policy implementation [and] market segmentation in a foreign exchange market that remains dependent on central bank interventions, despite initial steps to liberalize the market,” are weighing on the outlook, said the fund.
Nigeria is finding many friends in the asset management community, however, and Nnanna’s inference that investors were happy with the window appeared true.
“Is the FX system in Nigeria doing its job properly? It depends who you ask,” Yvette Babb, executive director for sub-Saharan Africa research and strategy at JP Morgan, told GlobalMarkets.
“The IMF would say that the flaw is the multi-currency nature of the system, and the central bank intervention in retail auctions, where they sell dollars at a lower rate.”
Babb says that the system was not “transparent”, adding that there was no one clearing rate “which would be the ideal practice”.
However, portfolio managers like the system because it has led to a deprecation of the naira, which is now less overvalued than it was.