Based on local media reports, the Association of Bureaux De Change Operators of Nigeria (ABCON) suggested last week that the CBN harmonise the multiple exchange rates within the country. The association recently launched a bureau de change (BDC) portal, setting an initial exchange rate of N399/US$. The past 15 months have brought a large divergence between the interbank (IFEM) and BDC rates (see chart), reflecting the sharp fall in oil revenues and resulting fx scarcity.
This, in turn, has led to a marked slowdown in both direct and portfolio inward investments. The equity space has had much reduced participation from offshore investors; a harmonised rate could bring some clarity and improve fx inflows. In terms of value, the ratio of foreign to domestic participation on the NSE was around 45: 55 in 2016, compared with 58: 42 in 2014.
The fx sourcing challenges have resulted in an upswing in input costs for most manufacturers. For those with fx denominated loans, the pain has been severe. For instance, Lafarge Africa reported an fx loss of N28bn in Q2 2016.
Furthermore, a harmonised fx rate would surely bring an uptick in the retail price of premium motor spirit (petrol/gasoline), which would prove politically unpopular.
However, some companies have benefited from the fx illiquidity. Local palm oil manufacturers are an example.
Sources: CBN; FBNQuest Research
We are assuming that ABCON is not pushing for a harmonized rate at the administered interbank level. The association may feel that its own BDC rate would be the appropriate level. We do not think the authorities are ready yet to take this suggestion on board. Inflation would pick up again, the body language of the MPC is negative and the political leadership is not convinced of the argument.
