All eyes on CBN as Egypt floats its currency



ALL eyes will be on the Central Bank of Nigeria, CBN, to see its next move especially with the decision of Egypt, which shares similar currency reforms with Nigeria, to abandon its struggle to hold the value of its currency against the dollar.

Both countries have come under the knife for using limited external reserves to defend their currencies against all odds. However, Egypt appears first to react, citing the need to attract independent dollar flows and slow down the pace at which its external reserves were burning, as the reasons for allowing the Egyptian pound float.

Weeks after Nigeria floated the naira in June, Egypt followed suit, although the International Monetary Fund (IMF) thought the Egyptian pound was still overvalued at 8.8/$ from 7.8/$.

Compared to emerging market currencies, the naira is the fourth weakest at N310/$ (official rate), above Indonesia, Korea, Chile and Colombia, but the CBN’s role as the single largest supplier of dollars is distorting the market and eroding investor confidence.

According to the chief economist at investment bank, Renaissance Capital, Charles Robertson, all that investors hope for is that Nigeria allows the market do its job in determining the naira-dollar exchange rate.

He adds that the pressure from the international community on CBN to unshackle the market of its aggressive and misleading intervention is not as pronounced as pre-devaluation in June, because there are less foreign investors in the country currently.
“But when Nigeria goes on investment road show to raise foreign loans, investors will ask all the questions because they are probably thinking, if Egypt can do this, then why not Nigeria?”

Nigeria’s planned external borrowing of $30 billion dollars within three years (2017-2019) may have gone cold following a spat between the executive and legislative arm over the strain it may have on public coffers.

But the country will certainly face foreign investors for a planned $1 billion Eurobond this year, which is only the first tranche of a total $4.5 billion, as it tries to spend its way out of economic recession and avert high local borrowing costs.

Data from the CBN show that gross official reserves declined by $580 million in October on a 30-day moving average basis to $24.0 billion. The monthly average movement has been an outflow of US$490m over the past 12 months.

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