After years of fixing FX prices, Nigeria's Central Bank floated the Naira in June. The loss of authority over the Naira was a critical step toward the elimination of Nigeria's numerous exchange rate windows.
It was also a long-overdue step claimed as part of President Tinubu's key reforms aimed at unified foreign exchange markets. However, a considerable arbitrage emerged two months after a Naira float that was designed to equalize rates.
On Tuesday, the Dollar traded at #758 on the I&E window, but traded at #860 in the parallel market, presenting an important arbitrage opportunity. CBN's failure to service the backlog of dollar demand is one of the major causes of the gap in both FX windows.
According to some estimates, the dollar demand backlog is about $2.5 billion. If such demands are not addressed, the parallel market will continue to be active.
Despite the improvements, the CBN has maintained a restriction on 43 commodities for which importers cannot get foreign currency via official channels, requiring anybody dealing with these items to use the parallel market. The World Bank pushed Nigeria last week to eliminate the limits to make the changes more meaningful.
Insight on the CBN Move to Fix the Naira
The CBN believes that the immediate measures will encourage foreign exchange inflows. It eliminated a policy that required IMTOs to pay remittance receivers in only foreign currency last month and boosted the number of registered IMTOs.The ultimate goal is to encourage payments to be sent through formal methods. Relaxing currency limitations is also connected to the fact that investors value stability.
Read more: https://www.investingport.com/experts-query-cbns-fx-reform-as-fx-market-arbitrage-widens/