The head of Nigeria’s foreign-exchange trading platform said the central bank is using “strong moral suasion” to prevent the naira from depreciating to a market-related level, and called on the regulator to let the currency float freely.
The market’s dysfunction is hindering the country’s economic recovery by deterring inflows from foreign investors and hurting manufacturers dependent on imports, according to Bola Onadele, the chief executive officer of Lagos-based FMDQ OTC Securities Exchange. FMDQ started operations in 2013 and its chairman is Sarah Alade, deputy governor of the central bank.
“What’s happening now, it’s not even a managed float,” Onadele said in an interview in Lagos, the commercial center, on Oct. 11. “I’m not sure what we’re doing. I don’t know the objective, the strategy and success benchmarks. The dealers and bank CEOs don’t want to be reprimanded. If they quote rates freely, they may be reprimanded by the central bank.”
Central bank Governor Godwin Emefiele abandoned a 16-month currency peg on June 20 that was blamed by analysts for sending the economy to the brink of recession and inflation to a decade-high of 18 percent.
While the naira has weakened 36 percent since then to around 310 per dollar, investors say the exchange rate is still being manipulated. The currency has fallen to 460 from 335 on the black market in that period as businesses struggle to access foreign exchange from their banks.
“The average daily turnover in the spot market used to be $1 billion and now it’s less than $100 million,” said Onadele, a former chief dealer at Citigroup Inc.’s Nigerian unit. “I don’t believe the parallel market is illegal any more. We have inadvertently legitimized it through some of our actions. It may no longer be as small a market as we used to think. If you have $1,000 to convert to naira, will you sell it at 315? No rational person will do that. You’ll sell to a bureau de change and get 460.”
Since the devaluation some bond investors, including Cape Town-based Allan Gray Ltd., have bought Nigerian T-bills, which yield as much as 20 percent.
Most are still too worried about the prospect of a further fall in the naira to re-enter the market, Onadele said.
Naira one-year forward contracts traded at a record high of 430 per dollar on Friday, suggesting further weakness is in store.
“No one believes the 305 price of the naira on their screens,” Onadele said. “That devaluation risk is still there. It would only melt away when the market establishes a credible price formation on the back of transparent trading operations by the banks. We need to have proper price discovery.”
The central bank felt the need to halt the depreciation at that point “through strong moral suasion,” Onadele said. “The interference was obviously not appreciated by both the domestic and international sellers, as supply of foreign exchange dried up.”