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Nigeria’s partial float will not relieve forex crunch

Monday, May 8, 2017

Subject

The naira's partial float.

Significance

On April 24, the Central Bank of Nigeria’s (CBN) new market-driven foreign exchange (forex) window for investors and exporters was launched. A muted market reaction reflected ongoing doubts over how the window will be funded, particularly in the short term as investors test the credibility of the window’s independence. Moreover, the multiplicity of exchange rates in the market will complicate forecasting future forex trends, which could deter crucial portfolio investors that rely on these predictions for their allocation decisions.

Impacts

  • Higher World Bank growth forecasts -- 1.2% in 2017 and 2.5% in 2018 -- could improve medium-term naira sentiment.
  • Increases in forex reserves above 30 billion dollars could overstate the CBN’s ability sustainably to defend the naira by 5 billion dollars.
  • CBN’s allocations to small and medium enterprises will not offset structural weaknesses in manufacturing and services.
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