The past ten days have seen some very large inflows at the investors’ and exporters’ fx window (NAFEX). The main source is said to be foreign portfolio investors (FPIs) in the fixed-income market. We see several compelling reasons for such a move: confidence in the stability of the current foreign-exchange regime now that the president has secured a second term; attractive returns; a new range for UK Brent/Bonny Light crude oil above US$60/b; a decent cushion of official reserves; and confidence that in these circumstances they can exit the market when they choose.
The fx regime is not popular with devotees of the free market, and is open to abuse. That said, it has posted some successes it would be churlish to deny.
Fx has been freely available for manufacturers (for their inputs), the middle class (for their medical and education fees abroad), and indeed for all legitimate users for close to two years. The preferential rate of +/- N307 per US dollar suits the authorities, not least for petroleum product imports.
The political leadership is supportive of the regime. It is topical to add that the senior ranks in the CBN have many years’ experience of managing the currency. The institution as a whole has to feel comfortable with the arraignments in place. It is worth noting that managed rates are prevalent in mono-export, developing economies.
We do not see any significant domestic pressure for change, and it therefore remains our view that the status quo will be maintained this year.
Average exchange rates (NGN per USD)
Sources: CBN; FBNQuest Capital Research
Federal governments for many years have talked of replacing the rentier economy with a diversified model that is production based. There are many reasons why progress has been painfully slow, and the fx regime is some way down a list that is headed by inconsistent policies, poor delivery, a neglected infrastructure, pitiful revenue collection and flaws in governance.