Naira slides 0.9% against dollar at parallel market

… analysts concern on risk of round-tripping

The naira yester- day depreciated in value against the US dollar by N1.00k or 0.9 per- cent at the parallel market following the Central Bank of Nigeria’s (CBN) policy restricting access to foreign exchange (FX) by importers of certain items.

After trading yesterday, the naira closed at N223/$ compared with N221/$ the previous day, BusinessDay survey reveals.

Also, at the Bureau De Change segment of the FX, naira lost N1.00k or 0.5 percent against dollar as it closed N221/$ from N220/$ the previous day.

However, foreign ex- change demand pressure re-laxed at the inter-bank mar- ket as naira gained N0.87k or 0.44 percent against dollar after it closed N197.71k/$ compared with N198.58k/$.

At the fixed income market, Nigerian five-year government bond yield rose 29 basis points.

The 2020 bond yield rose to 14.49 percent in early trades from 14.2 percent on Wednes- day.

Traders said domestic investors and pension funds were switching into bonds with higher yields to shield themselves from the potential inflationary impact of the new foreign exchange policy.

Yields across all maturities rose on average 10 basis points yesterday, after an 11 basis point rise on Wednesday, one trader at a major commercial bank told Reuters.

Contrary to the CBN’s claim that the implementation of the policy will help conserve foreign reserves, Razia Khan, managing direc- tor, head – Africa Macro Global Research, Standard Chartered Bank, London, said “in our view, rather than safeguard FX reserves, this will likely only add to the pressure on existing reserves.”

The immediate impact of the restrictions, she said, will be to push even more de- mand to the parallel market, as very few importers will be in a position where they are able to generate their own FX.

The parallel market is a retail market that has neither the depth nor the liquidity to be able to deal with large corporate demand.

In the first instance, the restrictions on FX for certain imports will drive up the price of these items in Nigeria.

For some items, which are intermediate goods, but not readily available in Ni- geria, the FX restrictions may cause a slowdown in investment.

If spreads between the parallel market and the in- ter-bank market widen, it raises the risk of round trip- ping, and creates other dis- tortions in the economy, she said in an e-mailed response to BusinessDay’s questions.

The London-based ana- lyst said the restriction on the use of FX for the purchase of foreign shares and bonds was also a concern.

Over time, this means that Nige- rians will receive less inter- est and dividend payments from abroad. It takes away a potential mechanism for boosting the income account on Nigeria’s current account.

HOPE MOSES-ASHIKE