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Nigeria Economy Commentary - Bon anniversaire, NAFEX!

Bon anniversaire, NAFEX!                                                                           

The 2014 oil price crash decimated Nigeria’s oil earnings, the country’s primary source of dollar inflows, exerting depreciation and liquidity pressure on the local currency. Despite persistent pressure on the exchange rate, the CBN opted to defend the currency by burning through its external reserves and enacting measures to manage dollar demand in the economy. This approach accelerated capital flight from the economy as investors feared a forced devaluation, further drying up dollar liquidity and adversely affecting dollar-dependent sectors of the economy.                                                                         

The peak of the currency crisis came in February 2017 when the dollar broke the ₦500 level in the black market (official rate at the time: NGN305/USD), but soon turned amid a simultaneous rise in domestic oil production and improving global oil prices. The CBN began to boost dollar liquidity through a series of regular currency auctions, before enacting the “Investors’ & Exporters’” (I&E) currency window or “NAFEX” fixing, a segment of the FX market where the naira could freely float. The NAFEX fixing has proved to be a game-changer in the FX story, and almost a year to the date of its conception (21st April 2017), we explore the most significant differences it has made to the Nigerian economy.                                                                                

The NAFEX fixing has been a boon to Nigeria’s FX market, boosting liquidity and price discovery, but also fostering investor confidence in the economy. The improvement in the FX market has been a critical element of Nigeria’s economic recovery. But the most obvious effect of the NAFEX fixing has been on the Nigerian Stock Exchange (NSE). The introduction of the NAFEX fixing encouraged foreign investors to return to the space, spurring a market rally that earned the NSE a podium finish on the global equity markets league table in 2017.                                                                          

The CBN seems keen on persisting with the current multiple exchange rate structure, though there is a slight possibility that it would collapse the different markets into its official window, should it feel it has the ammunition to stabilize a floating naira at that level. Longer-term, the exchange rate remains vulnerable to oil shocks, and given the volatility of the global oil market and explosiveness of Niger Delta militant groups, Nigeria’s FX market is unlikely to attain the desired invulnerability anytime soon. For now, at least, we can raise a toast to the NAFEX window for the changes it has wrought.