Following the threat by JP Morgan to eject Nigeria from its Emerging Market’s Government Bond Index (GBI-EM) by the year end, Nigeria’s Central bank has called for an emergency meeting with CEOs of commercial banks operating in Nigeria. The meeting is expected to be dominated by discussions around the Central Bank’s policy on the foreign exchange market, liquidity, and devaluation.

JP Morgan’s threat

Last week, JPMorgan reaffirmed its threat to remove Nigeria from the Government Bond Index (GBI-EM) by December unless the Central Bank of Nigeria, CBN, restores liquidity to the foreign exchange market (Forex market) to allow foreign investors, tracking the benchmark, to transact with minimal hurdles. This threat came after Nigeria was placed on a negative index watch in January.

Nigeria was added to the widely followed index in 2012 when foreign investment was at an all-time high and liquidity was improving. It is only the second African country to be listed on the index, after South Africa.

Removing Nigeria from the index would force foreign investors to sell Nigerian bonds from their portfolios, raising borrowing costs for the west African country.

Devaluation of the Naira

Nigeria’s Forex market has been under pressure after the prices of oil, the country’s main source of revenue, began to nose-dive from mid-2014. Since it was hard for the country to absorb the shocks of the price crash, it devalued its currency in November last year. To further curb speculations on the Naira and save its dwindling foreign reserves, the Central Bank went on to impose tight regulations on the foreign exchange market. The restrictions included limiting the amount commercial bank customers can spend using their debits cards while abroad. These moves are said to have reduced liquidity in market.

Though the Naira has regained some momentum since the conclusion of the general elections in May (gaining more than 2 percent against the Dollar during this period), many believe a second devaluation is inevitable as the Naira still isn’t trading at its fair value.

Traders are optimistic that the outcome of the meeting will help ease the tight control of the forex market and allow the Naira find its true value.