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Nigeria – Which FX Rate Matters More?

· Inflationary pressure is rising despite an unchanged official USD-NGN FX rate
· The parallel market FX rate may be playing a more important role in price determination
· This has potentially far-reaching implications for Nigerian FX and economic policy
· Price gains despite an unchanged official FX rate

The Standard Chartered-Premise Consumer Price Tracker (SC-PCPT) rose 0.44% m/m in January, following a 0.64% m/m gain in the previous month.

In all, 10 out of the 12 categories surveyed demonstrated y/y price gains, with only two – ‘pulses, nuts and seeds’ and ‘starchy roots, tubers and plantains’ – exhibiting y/y deflation. This suggests that prices are rising, despite attempts to keep the official Nigerian naira (NGN) exchange rate unchanged, at just under 200 versus the USD.

In January 2016, the authorities discontinued the sale of FX to Bureaux de Change (BDC), triggering a more rapid pace of NGN depreciation on the ‘parallel’ market. At the time of writing, BDC FX rates have reportedly reached c.305-310, signalling a widening spread versus the official exchange rate.

The findings of the SC-PCPT suggest that prices continue to be pressured higher, despite official attempts to hold the interbank USD-NGN rate steady.

Although an important part of the rationale for resisting an official devaluation is to keep fuel prices and inflation moderate (around 50% of Central Bank of Nigeria FX allocations to commercial banks are used to fund fuel imports), the evidence from our SC-PCPT suggests that the parallel market FX rate may be playing a more important role in the determination of overall prices in Nigeria.

This has potentially important economic and policy implications. As more demand is pushed to the BDC segment – until now, a largely cash-based, retail and illiquid segment of the FX market – the tendency for the USD-NGN FX rate to overshoot will likely be exacerbated. Notwithstanding the weak growth backdrop, this may feed into greater price pressures. Monetary policy is poorly equipped to respond.

By Razia Khan
Chief Economist [Africa]
Standard Chartered Bank

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