BY EMEKA EJERE
There is decreasing possibility of stability in the nation’s foreign exchange market, no thanks to worsening liquidity crisis arising from unintended consequences of recent reforms in the market.
Since the Central Bank of Nigeria (CBN) announced the unification of the FX windows in June, the local currency has been struggling against major currencies. Although the policy has earned the apex bank kudos from financial analysts, the subsequent unintended consequences have had detrimental effects on the economy.
The CBN had noted that the harmonisation of all segments of the Nigerian forex market, allowing the naira to float or FX rate to be determined by the laws of demand and supply, was part of the Federal Government’s efforts to improve liquidity and stability in the market and attract foreign investors.
But the local currency has maintained a disturbing slide against the greenback, raising concerns among analysts that the policy step of exchange rate unification may not be the panacea to Nigeria’s current economic realities.
The naira which was N432/$1 at the official CBN rate is currently at N762.71/$1 while at the parallel rate also known as the black market, it is standing at N920/$1.
Before now, in mid-August, the local currency weakened to an all-time low against the dollar at the para llel market, trading at 950/$. The development further widened the gap between the official and unofficial rates of the naira, defeating the essence of CBN’s unification of the rates.
However, speaking at the end of the last Monetary Policy Committee meeting in Abuja, acting governor of CBN, Folashodun Shonubi, assured that the apex bank would address the demand pressure on the country’s exchange rate.
Shonubi said, “The market needs to find its level. There is pent-up demand which the market cannot cater to. Once we clear this demand, the volatility will normalise. We have started intervening, and we would continue to intervene until the market gets to our level.”
Going extra mile
From the CBN governor lashing out at black market operators and speculators, to the reintroduction of the Bureau De Change (BDC) operations with new operational changes, the apex bank has been throwing all manner of approaches at the naira in a bid to stabilise it.
Under the new framework, the spread on buying and selling by BDC operators is set to fall within a permissible range of -2.5 per cent to +2.5 per cent of the Nigerian Foreign Exchange market window’s weighted average rate from the previous day. Again, the move was touted as one that would provide more stability and transparency to exchange rate fluctuations.
The Nigerian National Petroleum Corporation Limited (NNPCL), recently announced that it had taken an emergency crude oil repayment loan of $3bn loan from the Africa Import and Export Bank (AFREXIM Bank), in order to strengthen the ailing local currency.
NNPCL, in a brief statement titled ‘Relief for the naira: NNPC Ltd secures $3bn emergency crude repayment loan from AFREXIM Bank,’ said the loan would be used by the oil company to support the Federal Government in stabilising Nigeria’s exchange rate. It was also gathered that the facility would also help in reducing the pump price of Premium Motor Spirit, popularly called petrol.
“The NNPC Ltd and #afreximbank have jointly signed a commitment letter and term-sheet for an emergency $3bn crude oil repayment loan. The signing, which took place today at the bank’s headquarters in Cairo, Egypt, will provide some immediate disbursement that will enable the NNPC Ltd to support the Federal Government in its ongoing fiscal and monetary policy reforms aimed at stabilising the exchange rate market,” part of the statement read.
Analysts, however, said while the move would infuse dollars into the economy, the loan would not address the concerns around foreign exchange in the long run. They said unless Nigeria stops importing petrol, the pressure on the reserves would persist.
According to a global currency ranking report titled: ‘Highest and strongest currencies in Africa’ by Clacified.com, the Naira last week emerged as the worst performing African currency in three months, even as it is missing in the list of the top ten foreign currencies in the market.
The report noted that dozens of African countries are higher than the Naira even though the Nigerian economy is Africa’s largest economy with the highest nominal GDP, an influencing factor in currency valuation. It further stated that the United States dollar (USD) remains the global benchmark when ranking currencies and placed the strongest currencies based on each country’s currency dollar strength or purchasing power.
Top on the list of currencies include: Tunisian Dinar, Libyan Dinar, Moroccan dirham, Ghanaian Cedi, Botswana Pula and Seychellois Rupee. Others include Eritrean Nakfa, South African Rand, Zambian Kwacha and Egyptian Pound with Nigeria conspicuously missing from the list.
Worse days ahead?
The Economic Intelligence Unit (EIU) had a couple of weeks ago predicted in its report about the naira that the Nigerian government would go back to a system where they have more control over the exchange rate, to prevent the local currency from losing its value much further. The Unit pointed out that the CBN, which manages the country’s money, does not have much experience handling a flexible exchange rate system.
The EIU said, “The CBN lacks experience in conducting monetary policy under a float, and the need to control rapidly increasing inflation will become more acute over time.
“Our forecast is finely balanced, but we expect a return to heavier exchange-rate management from the second half of 2023 as the naira slides beyond N800:US$1 from N770:US$1 in early July.”
The research and analytical firm argued that there is currently a shortage of foreign currency in the country, especially when it comes to fulfilling demands for foreign exchange through Form A and M. This, combined with speculators taking advantage of the situation, might push the CBN to step in more and “intervene” in the market, especially since about 98 percent of their foreign reserves are in cash.
However, the EIU noted that Nigeria’s foreign reserves are still relatively liquid, which means they can pay for imports for at least another six to eight months. Some analysts believe this gives the government enough time to increase revenue, stop financial leaks, and pay off some debts.
The report also projected that because of the unstable exchange rate and how it affects people’s lives, the naira would lose its value more slowly than expected in the medium to long term. They estimated that the average rate would be “N815 to US$1 in 2024” and will further decline to “N1,018 to US$1 by the end of 2027”. This is around 10 to 15 percent less than what the black-market exchange rate would be during the same period.
Reacting to the situation, the Managing Director of Cowry Asset Management Limited, Johnson Chukwu, blamed the continued depreciation of the value of the naira on illiquidity in the FX market. According to Chukwu, there is need for more liquidity intervention from the CBN, to stabilise the exchange rate and clear demand arrears, for Nigeria to achieved some level of stability, and restore confidence in the FX market.
“The direction that the naira will go is dependent on the confidence that people have on the local currency and that confidence will come from the belief that there is enough supply to meet demand,” he said.
Professor of Economics, Ekpo Akpan, believes the various attempts to stabilise the naira are not likely to be effective if there were no attempts to boost manufacturing.
He said, “If your economy is not productive, you are going to have a problem with the value of your currency. Our economy is a consuming economy. So, you cannot float your economy, you have to do a managed float. The emphasis is on the word managed. The dollar, pounds sterling, Euro are not your money. You cannot have enough.
“It is a supply and access problem. The economy has to be productive and export non-oil goods and services and earn foreign exchange.
“So, NNPCL borrowing from Afriexim bank will not help much; even CBN bringing back BDCs will not help because in most countries BDCs look for their own dollars. They also buy and sell. Nigeria and Kenya were the only ones giving dollars to BDCs to sell, which is not the right approach.”
