Since the Central Bank of Nigeria rolled out its revised forex policy on February 21st 2017, the initial success of the policy seemed to justify it. Within a month of its introduction, the Naira gained 100 points or 30% of its value in the parallel market. However, certain analysts kept warning that the actions of the CBN would garner only temporary success, unless a full float was sanctioned. One of these is the International Monetary Fund (IMF) who, to the ire of most Nigerians, last week, said that the Naira was over-valued by as much as 20%. As ridiculous as that sounded, it seems the IMF could be right. The graph below shows exchange rates in the parallel market since the CBN revised its policy.

As observed, within the first week of the announcement of the revised policy, the Naira strengthened by as much as N80 to a dollar. This was expected as the sudden injection of hitherto scarce dollars into the market created a sell frenzy among dollar owners. As simple economics dictates, this resulted in the sharp drop experienced within the first week.

Subsequently, the parallel market stabilized at around N450/$1. This was until March 21st 2017. The Monetary Policy Committee rose from its meeting with rates unchanged and the CBN governor pledging to further support the Naira with more interventions. At this point, the CBN had pumped upwards of $1 billion into the forex market. Once again, a flurry of activity met this news, and the Naira gained in the parallel market and sold for as low as N375/$1. Murmurs of dollar glut were beginning to arise and banks were starting to reject dollars offered them by the CBN.

Buoyed by its gains as at this point, the CBN on March 28th announced a revaluation with new rates for commercial banks and Bureau de Change operators. This proved to be their undoing as a reversal began.

Gradually, the Naira rose from N375 steadily for 2 weeks, and is now selling at about N400/$1. Unlike in previous cases, no new announcements of the CBN could strengthen the Naira. From increasing the amount BDCs could sell to opening a special window for SMEs, the parallel market seemed unshaken.

The argument of the CBN is that the weakening of the Naira was due to forex scarcity, caused by speculators who hoarded dollars. If that is true, then that problem has been solved as there are more dollars than can be handled. Simple economics says that higher supply of a commodity should lead to lower prices of that commodity until a certain breakeven point is reached. The Naira seems to have reached that point. If that is so, then N400/$1 represents a 26.8% increase over the N315/$1 used in the 2017 budget and 31.4% more than the N306/$1 interbank rate. This means the IMF was right after all.