Goldman Sachs, one of the largest investment banks globally, has described Nigeria’s new foreign exchange (FX) rate regime as a desirable monetary policy step for sustainable growth of the nation’s economy in view of the multi-dimensional benefits to the political economy.
The bank, in a report published on Wednesday titled “CBN Devalues the Naira and Abolishes Official Exchange Rate Segmentation Policy”, interpreted the pace and content of recent policy announcements as significant positive surprises to our and market expectations and as being supportive of a constructive view on sovereign credit.
Although wary about the true intent of the policy, the investment bank advised the government that in order to make the monetary policy measure achieve positive impact on the nation’s economy, there was the need to hike interest rates in view of the negative real interest rates for local fixed-income instruments.
On interest rates, Goldman Sachs pointed to Nigeria’s low fixed-income securities, which the banks still quote for about 8.5% for deposits of about N250 million and above.
It stated: “As we have argued previously, introducing currency flexibility and/or easing restrictions on access to FX would very likely need to be accompanied by higher local interest rates (with prevailing short-term market interest rates currently deeply negative in real terms.”
While welcoming the new FX rate policy, the investment bank, however, raised concerns about the fact that currently there is no clarity on Nigeria’s current account.
Goldman Sachs stated that “in addition to the devaluation, the CBN issued a communique specifying that it has collapsed all of its (multiple) official FX rates into the Investors and Exporters (I&E) window but did not provide any clarity on current/capital account FX restrictions that result in a parallel market exchange rate that is weaker than that offered at the official window(s).”
This is even as it also pointed out that while devaluation remained important it was not enough to unify the official and parallel exchange rate, adding that in its view, “devaluing the currency is a necessary but not sufficient condition for unifying the official and parallel-market exchange rates.”
Similarly, Goldman Sachs also stated the need for the government to clear the FX pent-up demand of $12 billion, which it considered was necessary to unify the currency, and that the apex bank’s directive did not provide guidance on whether it will lead to a flexible exchange rate or if it will continue with its fixed exchange rate policy.
The bank further clarified: “We think that easing FX restrictions and clearing the FX backlog (that we estimate at US$12bn) would be required to achieve a unified Naira exchange rate.”
“In terms of the broader FX policy set-up, the CBN did not provide any guidance on whether the (historically heavily managed) currency regime would be maintained or if there might be any transition toward a more flexible exchange rate. In our view, any FX liberalization or easing of FX restrictions would entail the need for higher local interest rates to lean against currency depreciation pressure”, it added
