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Naira Outlook: CBN working on gradual unification of exchange rates
No doubt Nigeria's currency has come under pressure in recent months; the Central Bank of Nigeria says it is working towards the gradual unification of exchange rates. But what does the CBN's recent move in asking lenders to bid for dollars at 5 per cent above the official rate mean for the markets going forward? Victor Aluyi, Head of Portfolio Management at Comercio Partners joins CNBC Africa for more.
Mon, 06 Jul 2020 14:31:55 GMT
Disclaimer: The following content is generated automatically by a GPT AI and may not be accurate. To verify the details, please watch the video
AI Generated Summary
- The CBN's move to adjust bidding rates signals a gradual approach to unifying exchange rates, responding to calls from global financial institutions for greater transparency in Nigerian markets.
- Challenges in achieving price stability due to economic complexities and external pressures require a delicate balance of policy measures by the CBN.
- Declining yields and investor preference for government instruments underscore market dynamics in Nigeria's fixed income segment, driven by liquidity and market conditions.
Nigeria's currency, the Naira, has faced significant pressure in recent months, prompting the Central Bank of Nigeria (CBN) to announce its intention to gradually unify the exchange rates. In a recent move, the CBN instructed lenders to bid for dollars at 5% above the official rate, sparking discussions about the implications for the market going forward. Victor Aluyi, Head of Portfolio Management at Comercio Partners, shed light on the situation in a CNBC Africa interview.
Aluyi noted that the CBN has been making adjustments to exchange rates since March, initially in response to the COVID-19 pandemic and most recently to address calls for unification from the International Monetary Fund (IMF) and the World Bank. The push for a single exchange rate has gained support from industry watchers, analysts, investors, and global financial institutions seeking greater transparency in Nigeria's markets.
However, some critics argue that markets should be left to self-regulate based on unique economic circumstances, cautioning against a one-size-fits-all approach to exchange rate management. Aluyi acknowledged the complexities of achieving price stability in Nigeria, given the country's economic structure and recent challenges such as low oil prices and fiscal revenue concerns. He emphasized the importance of transparency in the exchange rate to attract foreign investors and promote market equilibrium.
The recent 5% adjustment in bidding rates prompted discussions about whether it signaled a devaluation of the Naira. Aluyi clarified that while the move could be seen as an adjustment, framing it as a devaluation was premature. Analysts view the adjustment as part of a gradual process towards rate convergence, indicating future movements in the exchange rate.
In terms of market impact, Aluyi highlighted the CBN's efforts in liquidity management to stabilize the foreign exchange market. Despite temporary successes in reducing rates, external factors pose challenges to sustained policy effectiveness. The sustainability of the CBN's interventions remains a key concern, leading to adjustments in policy strategies to accommodate evolving market conditions.
Shifting to fixed income markets, Aluyi explained the trend of declining yields, driven by positive market conditions and abundant liquidity. Investors have shown a preference for medium to long-term bills, resulting in a 15 basis points decrease in average yields and a closing rate of 2.1% on Friday. The influx of liquidity and the attractiveness of government instruments continue to influence yield trajectories in Nigeria's fixed income market.
Looking ahead, Aluyi anticipates continued yield compression and market stability in the fixed income segment, supported by ongoing liquidity and forthcoming government securities issuance. The trajectory for fixed income investments in Nigeria appears favorable in the coming months, buoyed by market dynamics and investor demand.
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