Bismarck Rewane, the Managing Director of Financial Derivatives Company, recently shared his optimistic views on the foreign exchange policies implemented by the Central Bank of Nigeria (CBN). Speaking on the Global Business Report show on Arise TV, he highlighted how these policies are beginning to show positive results, helping to bring the value of the naira—a key currency in Nigeria—closer to what is considered its fair value.
In recent weeks, the naira has been gaining strength in both the official and parallel markets. For instance, it closed at 1503.63 naira to one U.S. dollar in the Nigerian Foreign Exchange Market Window and at 1,500.00 naira to one dollar in the parallel market. This strengthening of the naira is significant and indicates a positive trend in the currency’s performance.
Rewane explained that a method known as Purchasing Power Parity (PPP) analysis suggests that the fair value of the naira should be around 1,102.15 naira to one dollar. This means that, currently, the naira is undervalued by about 26.35 percent. He pointed out that while trying to protect a currency that is overvalued can lead to market distortions, supporting a currency that is undervalued can help correct these imbalances. Essentially, the CBN’s actions are aimed at bringing the naira back to its rightful value.
The CBN’s interventions are designed to stabilize the currency and ensure it aligns more closely with its fair value. Rewane praised the central bank for its efforts, stating that these interventions are crucial for the overall health of the economy. He emphasized that it is essential for the naira to reflect its true value in order to foster a stable economic environment.
One of the key indicators of the effectiveness of these policies is the narrowing gap between the official and parallel exchange rates. Rewane noted that this difference has now dropped to less than one percent, a significant improvement from previous levels, which were as high as 10, 15, or even 20 percent. This reduction signifies that the market is becoming more efficient and that price discovery is improving, meaning that the currency’s value is being determined more accurately by market forces.
Furthermore, Rewane pointed out that Nigeria’s balance of trade has reached $18.6 billion, which is the highest level seen in a long time. The balance of trade measures the difference between what a country exports and what it imports. This positive figure indicates that Nigeria is exporting more goods than it is importing, a trend that can be attributed to the changes in the exchange rate and specific policies aimed at boosting exports while discouraging imports.
In addition to these positive trends, Rewane mentioned that the market is increasingly aware of the benefits of import substitution. This means that local producers are finding it more profitable to produce goods domestically rather than relying on imports. This shift not only helps strengthen the naira but also contributes to the overall growth of the Nigerian economy.
In summary, Bismarck Rewane’s insights reflect a growing confidence in the Central Bank of Nigeria’s foreign exchange policies. With the naira strengthening, the gap between official and parallel exchange rates narrowing, and an improving balance of trade, it appears that these measures are having a beneficial impact on the economy. Rewane’s analysis suggests that the CBN’s actions are steering the naira toward its fair value, which is essential for fostering a stable and prosperous economic environment in Nigeria.
