Price and monetary stability concerns as Naira plunges further at the parallel market and official windows.




By Chinedu Okoye
October 19th, 2023




Summary:

 • Naira continues to plunge in both official and parallel markets following a move by the Apex Bank that could send Naira to historical lows.

 • Stagflationary concerns emere as policy seen able to plunge the Naira as prices soar.

 • Unrestricted and unmanaged flow of Foreign transactions doesn't ensure price, monetary or exchange rate stability.


Naira Plunges in Both Official and Parallel Markets:

On Tuesday, October 17, 2023, Naira rates plummeted to as low as N1100, following a prior drop to N900/$1 at the official markets before recovering to N841/$1. The President of ABCON also refuted claims that the organization instructed its merchants to trade below N1000/$1. 

In response to the Central Bank's directive to lift the ban on Forex sales for around 41 goods, I previously expressed concerns in an article. It was noted that this move could send the Naira into a downward spiral, even though it might align official and parallel market rates.


Stagflationary Concerns:

The longer-term issues identified include slower industrial development and a higher inflationary environment, essentially a stagflationary situation that we are approaching. This is because, given our heavy reliance on imports, removing the restrictions would drive up the cost of obtaining Forex.

The demand for both essential and non-essential imports could strain our foreign reserves and discourage local and foreign investments. The reversal of the policy ban appears poorly conceived and seems to disregard the trade and industrial development interests of the nation.

Without a structural shift in the composition of our foreign receipts and a substantial increase in our Forex reserves, achieving stability or setting a floor on the Naira's depreciation remains challenging.


Central Banking Mandate:

The Central Bank of Nigeria has a mandate to ensure monetary and price stability, issue legal tender currency in Nigeria, and maintain external reserves to preserve the international value of the legal tender currency.

Allowing an unrestricted and unmanaged flow of foreign exchange transactions does not guarantee exchange rate, monetary, or price stability. In a free-for-all market, it becomes challenging to establish clear boundaries, leading to issues with exchange rate stability.

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