After years of fixing FX prices, Nigeria's Central Bank floated the Naira in June. The loss of authority over the Naira was a critical step toward the elimination of Nigeria's numerous exchange rate windows. 

It was also a long-overdue step claimed as part of President Tinubu's key reforms aimed at unified foreign exchange markets. However, a considerable arbitrage emerged two months after a Naira float that was designed to equalize rates. 

On Tuesday, the Dollar traded at #758 on the I&E window, but traded at #860 in the parallel market, presenting an important arbitrage opportunity. CBN's failure to service the backlog of dollar demand is one of the major causes of the gap in both FX windows. 

According to some estimates, the dollar demand backlog is about $2.5 billion. If such demands are not addressed, the parallel market will continue to be active. 

Despite the improvements, the CBN has maintained a restriction on 43 commodities for which importers cannot get foreign currency via official channels, requiring anybody dealing with these items to use the parallel market. The World Bank pushed Nigeria last week to eliminate the limits to make the changes more meaningful. 

Insight on the CBN Move to Fix the Naira

The CBN believes that the immediate measures will encourage foreign exchange inflows. It eliminated a policy that required IMTOs to pay remittance receivers in only foreign currency last month and boosted the number of registered IMTOs. 

The ultimate goal is to encourage payments to be sent through formal methods. Relaxing currency limitations is also connected to the fact that investors value stability. 

However, these early tactics have not resulted in big swift wins. While the Nigerian Stock Exchange is experiencing a bull run that has brought it close to an all-time high, investors are not flocking to the country. 

Many of these worries stem from the possibility that the CBN would be persuaded to peg the Naira again if the gap between the parallel and I&E markets grows. 

But everything indicates that the CBN is calm following the MPC meeting last month, where the CBN acting governor, Folashodun Shonubi, stated that volatility is to be expected. He also stated that the bank will continue to intervene to bring the markets back to where we believe they should be.

His admission that pent-up demand is driving the current crisis demonstrates that the CBN chairman understands the problem, but it remains to be seen how swiftly the bank's involvement will have an impact. 

Wale Edun, the Tinubu administration's monetary policy advisor, told legislators Wednesday that the situation would improve as cash flows in. According to Bloomberg, “The fundamental value of the naira should be somewhere around 700.”