Naira slips to 491/$1, as experts predict further depreciation  

The Naira yesterday fell slightly at the parallel market to 491 per US dollar, a rate far better than the N500 predicted by some financial analysts before the New Year.

However, analysts at Financial Derivatives Company (FDC) in their outlook for the naira in 2017 believed that the local currency under the current market regulatory framework will remain under pressure, unstable until the market is allowed to operate freely and efficiently.

But the naira, on the parallel market, closed at 491 to a dollar against the 490 it traded on Friday and throughout the weekend.

Forex traders said that the local currency on Monday morning exchanged around 510 to a Euro and 600 to Pound, but closed at 511 to the Euro and remained unchanged against the Pound Sterling on the parallel market.

The analysts, who were led by the company Chief Executive Officer, Mr Bismarck Rewane, said that the adoption of multiple exchange rates which involves the use of different exchange rates for different transactions has a lot of consequences for the local currency.

In its monthly economic report with the theme, “2017 Periscope: Year of Hope, Anticipation and Aspiration,” the FDC crew said multiple exchange rate usually forms an important component of an interventionist or state-controlled economic development model.

The consequences according to the analysts include pervasive state intervention in the economy; financial repression; restrictive trade regimes and closed capital accounts.

The costs are high in terms of trade regimes, exchange controls leading to barriers to export sector and reduced foreign exchange (forex) earnings.

According to the FDC think tank, the multiple exchange rate regime also leads to misallocation of resources, lower fiscal revenues and a smuggling boom as well as rent seeking activities driven by a complex set of administrative controls.

For Nigeria to escape from this forex trap, the authorities need to understand that there is a need for a properly functioning market said FDC analysts.

A well functioning forex market the company stated, allows the exchange rate to respond to market forces and reduce market distortions.

In the words of Rewane: “Russia and Kazakhstan recently did this and their currencies sank for a short period and then recovered sharply. On the other hand, Venezuela fell into the trap and has become a basket case.

“The CBN will need to eliminate or phase out regulations that stifle market activity; create a sense of two-way risk in the market; reduce its market-making role and stop indirect or overt rate determination; increase market information on the sources and uses of foreign exchange; there must be liquidity, transparency and openness; the CBN as a regulator must be firm in dealing with market infractions.”

According to FDC, forex policies usually complement trade and investment policies. The Nigerian government will in 2017 strive towards greater coordination of these policies, and will move from its current bias for a command economy monetary policy towards a mixed economy.

“I believe that with oil prices at $55pb and production back up to 2 million BPD, the naira will slip in the interbank markets to N350-N380/$. It will fall in the parallel market to N520/$ before recovering sharply to N425/$.

“These projections are based on the assumption that the market will be reformed and that sanity will return to what is now essentially a foreign exchange asylum,” the FDC CEO stated in a comment.