CBN’s Naira 4 Dollar fails to incentivize forex market as Naira weakens

The Naira for Dollar Scheme recently introduced by the Central Bank of Nigeria has failed to incentivize the foreign exchange (forex) market as Naira weakened further against the Dollar on Monday, 15^th of March.

At the parallel market, the naira depreciated by 1.04 per cent to N485 per dollar, on the same trend with the Bureau De Change (BDC) segment, where naira depreciated by 0.42 per cent to close the weekend at N477 per dollar.

However, at the official Investors & Exporters (I & E) window, naira appreciated by 0.24 per cent to close at N410 per dollar amid sustained rise in crude oil prices.

Data provided by Cowry Asset Management showed that naira closed flat at N380.69 per dollar at the Interbank Foreign Exchange market amid weekly injections of $210 million by CBN into the forex market.

The apex bank’s Naira for Dollar Scheme aims at encouraging dollar remittances by paying N5 for every dollar received. The scheme took effect from March 8, 2021 and is scheduled to end on May 8, this year.

Market pundits said the scheme was a “too little attempt” to correct pricing anomalies fostered by policy inconsistencies and lack of clarity. The market saw the naira incentive as a subtle devaluation of the national currency.

“However, we feel that the CBN’s Naira for Dollar Scheme appears to be another form of Naira depreciation which may have sent the wrong signal to the forex market,” Cowry Asset Management stated.

Senior Research Analyst, FXTM, Lukman Otunuga said policy somersaults over the past few weeks have fostered a sense of uncertainty.

According to him, although the country remains on a fragile road to economic recovery, a series of policy u-turns over the past few weeks has fostered a sense of uncertainty.

He also described the scheme as a devaluation, but with little effect to assuage the market.

He pointed out that over the past few months, Nigeria has faced persistent dollar shortages, which has weighed heavily on the local currency and stoked inflationary pressures.

Cordros Capital, a leading investment banking group, said the apex bank’s refusal to “drastically overhaul its foreign exchange policy and allow for proper price determination in the exchange rate is the primary reason for the divergence” between the official and parallel markets, the symptoms of which the scheme aimed at correcting.

According to Cordros Capital, while the apex bank sees the bypassing of official channels partly responsible for the significant disparity between the parallel and official forex rates, thus the Naira for Dollar Scheme, there are many underlying reasons for the flows including the wide disparity between official and parallel rates.