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Address multiple exchange rates to increase inflows

As Nigeria’s external reserves recorded an increase of $220.04 million last week to $38.84 billion as of June 20, 2022, analysts have underscored the need for the country to tackle multiple rates exchange in the country in order to attract investors and increase dollar inflows.

The value of the naira had depreciated in the parallel market, selling at 615 naira to the dollar as it closed on the window for investors and exporters at 420.21 naira to the greenback. As of June 23, inflows at the I&E counter stood at $427.94 million, down 25.5% from the previous week as trade was consumed between N410.00 and N453.55 for a dollar.

According to FXTM Senior Analyst Lukman Otunuga, the multiple exchange rate in the country is a challenge that discourages investors.

“Falling oil revenues and declining foreign exchange reserves are forcing Nigeria to ration dollars. The negative impacts continue to be reflected throughout the local economy and currency. But now dollar shortages have caught the attention of MSCI Inc. which is considering downgrading the MSCI Nigeria indices to standalone market status from frontier markets.

“It should be kept in mind that a developed market is ranked highest, followed by emerging markets, frontier markets, and then finally standalone markets at the bottom. Given the difficulty in repatriating funds from Nigeria, this has put the MSCI Nigeria indices in the crosshairs.

“Such a negative development could affect sentiment towards the country’s assets at a crucial time when economic growth remains fragile.” Otunuga noted.

In addition, Cordros Research analysts said there was a need to close the gap between different segments of the market which has expanded to almost 200 naira.

President Muhammadu Buhari had recently justified the position of the Central Bank of Nigeria (CBN) on exchange rate management, saying that the administration could not unify the naira exchange rates due to the effects an adjustment would have. on the citizens of the country.

On why the country did not give in to calls from the International Monetary Fund (IMF) and the World Bank to unify exchange rates in official and parallel markets, he said: “The exchange rate is still susceptible to external shocks that can suddenly and severely affect Nigerian citizens.

According to him, the country will move towards unification only after increasing domestic production of refined fuel and food, as imports largely responsible for foreign exchange shortages. “As we increase domestic production – both of fuel (enabled by PIA) and food (agricultural policies) – the inflationary threat will diminish and we can move towards unification,” he said.

While the CBN continues to draw on external reserves in its effort to support the value of the naira, analysts say this is only a short-term measure as more inflows are needed to meet the demand. request.

Cordros analysts note that while the CBN has enough liquidity to support the foreign exchange market in the short term, “we emphasize that foreign inflows are critical for sustained foreign exchange liquidity in the medium term.

“Given the modest increase in reserves given the low level of crude oil production and high PMS under-recovery costs, the foreign portfolio investments that have historically supported supply levels in the I&E window will be required. to maintain medium to long-term forex liquidity levels.

“Therefore, we believe that further adjustments to the naira-to-dollar peg closer to its fair value and exchange rate flexibility would be important in attracting foreign flows to the market.”

CBN Governor Godwin Emefiele had recently stressed the need to stimulate the inflow not primarily of investors, but of the country’s non-oil export potentials.

Earlier this year, the apex bank launched the RT200 program which aims to generate an inflow of $200 billion into the country over the next three to five years.

While the target of $200 billion in non-export revenue may seem out of reach for some at the moment, the CBN Governor is quite optimistic that the target will be met within the next three to five next few years, saying, “I am resolute and determined that we can achieve this.

According to the CBN Governor, the program was born out of the realization that most of our current sources of foreign exchange inflows were unreliable and constantly subject to the exogenous vicissitudes of global economic developments.

“We have all witnessed the ever-changing fortunes of oil-exporting countries. Even those who are known to manage their oil revenues well also suffer major shocks once oil prices fall. In order to avoid these sudden adjustments in our economic life, we needed to focus on strategies that can help us gain more stable and sustainable currency inflows. We should follow the best practices of other countries and make sure to protect ourselves somewhat from factors that are beyond our immediate control.

“Many countries that are much less endowed than Nigeria are doing this. Consider, for example, that agricultural exports from the Netherlands alone were worth around $120 billion last year. Yet the Netherlands has a land mass of around 42,000 square kilometers, which is much smaller than the land mass of Niger State alone, which spans over 76,000 square kilometers.

pressing confidence that the decisions taken at the end of the summit will be invaluable in helping us achieve our ultimate goal of $200 billion in non-oil exports over the medium term.

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