People & Money

As Investors Bank on Naira Devaluation, Stock Market Hits Highest Level Since 2008

According to a report from Bloomberg, the Nigerian Stock Exchange (NGX) witnessed a remarkable upswing on Tuesday, reaching its highest level since July 2008. This surge occurred on the first day of trading following the suspension of Godwin Emefiele, the Central Bank Governor.

As reported by Bloomberg, investors are making predictions about a possible Naira devaluation, which led to a rise in the main index of the Nigerian Exchange. The index surpassed 57,437 points, in contrast to the steady performance of MSCI’s main emerging equity benchmark. It was noted that based on yesterday’s trading activity, NGX’s year-to-date gains hit 11.8%, which is nearly double the 6% return of the MSCI index.

Also Read: CBN vs NESG: The CBN’s Communication Failings in Full Glare Again

During his inauguration, President Tinubu noted that the Central Bank will work towards unifying the exchange rate. And on the 1st of June, Daily Trust carried a report that the CBN had devalued the Naira to N631/$1 however, the CBN vehemently denied this report.

What steps would be taken to ensure the unification of the exchange rate remains unknown, however, in speaking to Bloomberg, Wale Edun, a close ally of the President noted that the unification of the exchange rate was close. He said, “I would say it would have to be done within a quarter rather than within a year. I think… quarters rather than years, that’s where I would put it.”

Nigeria’s multiple exchange rates have unfairly favoured wealthy individuals and companies, granting them access to cheaper dollars at the official rate which results in an arbitrage system. The various exchange rates in Nigeria encompass the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) or Investors and Exporters (I&E) forex window, the parallel market rate, International Air Transport Association (IATA) rate, Interbank Exchange Rate, and Bureau De Change (BDC) rate.

Foreign investors in Nigeria are eager for a transparent exchange rate policy, as it is the crucial element needed to facilitate their renewed interest in the Nigerian Stock Exchange. Over the past nine years, foreign participation in the Nigerian Stock Exchange has significantly declined as it dropped from 56.81% in 2015 to 16.67% in 2022. According to experts, this trend is attributed not only to the exchange rate turmoil in Nigeria but also to the frequent upward adjustments in the Monetary Policy Rate (MPR). In 2022 alone, the MPR witnessed six consecutive hikes, leading to huge borrowing costs that have deterred investors.

With the exit of Mr. Godwin Emefiele, it is expected that the Central Bank of Nigeria will figure out measures to float the Naira in line with market realities. And one possible solution could involve eliminating certain requirements like Form A, which sometimes acts as a restrictive regulation for Nigerians seeking to engage in foreign transactions. There are also speculations that the restrictions on domiciliary accounts placed by the CBN may be removed.

Also Read: Any lessons from CBN’s surreptitious devaluation of the naira?

To achieve a unified exchange rate, Nigeria’s most effective strategy would involve the Central Bank of Nigeria (CBN) replacing stringent measures on foreign exchange transactions with more lenient ones. This would facilitate a smooth flow of foreign currency into and out of the country.

David Olujinmi

David Olujinmi studies Engineering but his true passion is research and analysis. He writes about finance, particularly the capital market, investment banking, and asset management. More »

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