Business
Can CBN Rescue Naira From Free-Fall
With the naira currently exchanging for N1045 to the dollar, fears are rife in some quarters that the much hype redemption of the local currency by the Central Bank of Nigeria (CBN) through a raft of policy interventions in recent times may be far from achieving its set objectives, reports Ibrahim Apekhade Yusuf
At the twilight of the former president Muhammadu Buhari administration some bookmakers had predicted to the chagrin of many that the naira currently exchanging for N1045 for a dollar in the last count at the parallel market was going to suffer the worst fate ever before the end of the year so much so that its value will be worth next to nothing even on the paper it is being printed!
Barely three months into the end of the year, what was considered then a doomsday prophecy of some sort has indeed become a sad reality among many Nigerians today.
Talk of the chicken coming home to roost, the fate of the nation’s legal tender is worse off than it was at least six months ago.
Naira descent to ground zero in few days
From available information, down from N1002 as at last Monday, the naira touched down to N1030+ last Wednesday and dropped swiftly to N1045 as at Friday, in a most significant way and manner hitherto unprecedented since the local currency began a downward spiral eons ago.
The genesis
The old regime of the forex market was something many financial analysts described as worrisome and unsustainable owing to its many headaches.
According to economic pundits, the old regime certainly led to rent seeking, and undid the economy ultimately. With the official price of N416/$1 not easily accessible as many people sourced their foreign exchange from the parallel market despite the wide gulf between the official and the parallel market rate, it was only inevitable that something just had to give in no time.
Serious round-tripping was the order of the day as those who got the rates at N461/$1 from the official window and sold it in the parallel market window such that they became billionaires overnight at the detriment of the economy, analysts informed.
Enter unification policy
But to arrest the anomaly, last June, the federal government officially floated the local currency after many years of multiple exchange rates, which many financial experts viewed as lacking a good direction for investors to bet on the economy.
It may be recalled that President Bola Tinubu took steps to unify the country’s multiple exchange rates just as he scrapped the costly petrol subsidy regime as the most immediate tasks within the first two weeks of his Presidency.
While lauding the development, the Executive Vice Chairman of Highcap Securities Limited, David Adonri, said the move signalled the deregulation of the foreign exchange market.
Adonri said, “It means that the naira is now floated, and as a result, the actual value of the naira at any point in time will be market-driven and determined.
“It can also enhance revenue to the federal government. A market clearance rate determined by forces of supply and demand signals the unification of the exchange rate.
“This is a giant stride in deregulating the economy, coming on the heels of subsidy removal. The structural rigidities in the economy and pressure points are gradually being eliminated.”
Unintended consequences of the forex unification policy
With the policy on unification rate effected what the apex bank didn’t factor in at the time is the fact that it could not necessarily bring about a steady stream of forex just by fiat as many people including corporate bodies still had to source for FX at the parallel market.
While commenting on the policy at the time, the president of the Association of Bureau de Change Operators of Nigeria (ABCON), Aminu Gwadabe, said the removal of the cap at the Investors & Exporters (I&E) window was done to allow for a true market clearance rate, which he said had been the agitation of several stakeholders in the economy to harness and increase various sources of supply of dollars into the economy.
Gwadabe listed such sources of supply as portfolio investments, foreign direct investments, diaspora remittances, and export proceeds.
“The directives, in my opinion, are to checkmate various illegal economic behaviours like rent-seeking, currency substitution, forex holding positions, and frivolous demands,” he said.
He was, however, quick to add that he foresaw the likely unintended consequences, in the short run, to be panic and a mild spike in the market that would push rates up.
“In the medium term, we will begin to see our sources of dollars inflow increasing in the market to provide the needed liquidity in the market for rates stabilisation.
“Being a definite free market structure, as supplies increase the rates, we’ll definitely come to settle down at a level of N600/N650 to the dollar with a somehow very little margin in both markets,” he said.
Like Gwadabe, a global development economist, Kazeem Bello, said the country needed to tread softly with the new directive as it could backfire and create more complex problems.
“We cannot handle the dollar market pricing like the petrol pricing. It will have severe dislocation for the market system, especially when there is acute scarcity of the commodity. People familiar with this should advise the government to tread softly.
“It will inflict pains and unnecessary costs skyrocketing. It may create a serious upset for the economy, especially in the short and medium term,” he added.
Four months after the floating of the exchange rate, many of those who foresaw the challenge may have been vindicated.
In what could be a soul-searching retort, during the screening session of members of the Senate, the new governor of the CBN, Olayemi Cardoso, had said he will prioritise clearing the apex bank’s backlog of unsettled foreign exchange obligations in the near term in an attempt to resolve the country’s forex crisis.
Reality bites
Checks by The Nation revealed that the situation is far from being over as the nation faces crunch time.
According to currency dealers in Abuja Zone 4 market, a dollar was exchanged for N1045 and sold at N1035 on Friday as against N1040 it traded the previous day.
Further checks on local dealers in Lagos, Abuja, Kano and Port Harcourt respectively, showed that the dollar to naira exchange rate remained constant at N1045 at the parallel (unofficial) market as at weekend.
Policy reversal on banned items
In what keen observers of the forex market have described as a heartening decision, the CBN on the back of the nagging issue of spike of the naira last Thursday lifted the foreign exchange restrictions it placed on importers of 43 items eight years ago.
In a statement signed by CBN’s Director of Corporate Communications, Dr. Isa AbdulMumin, the bank said this is a significant change to the foreign exchange market policy.
According to the central bank, this action will boost liquidity in the Nigerian Foreign Exchange Market and intervene from time to time, stating that interventions will decrease as liquidity improves.
It would be recalled that in a circular in June 2015, the CBN published a list of imported goods and services that will not be eligible for foreign exchange in the Nigerian foreign currency market. The list which was originally 41 was updated to include two more items. A careful perusal of the listed items such as rice, cement, margarine, palm kernel, palm oil products, vegetable oils, meat and processed meat products, vegetables and processed vegetable products, poultry and processed poultry products, tinned fish in sauce (Geisha)/sardine, cold rolled steel sheets, galvanised steel sheets, roofing sheets, wheelbarrows, head pans, metal boxes and containers, enamelware, steel drums, steel pipes, wire rods (deformed and not deformed), iron rods, reinforcing bars, wire mesh, steel nails, security and razor fencing and poles, wood fiberboard and panels, plywood boards and panels, wooden doors, toothpicks, glass and glassware, kitchen utensils, tableware, tiles-vitrified and ceramic, gas cylinders, woven fabrics, clothes, plastic and rubber products.
Others include polypropylene granules, cellophane, wrappers and bags, soap and cosmetics, tomatoes/tomato pastes, Eurobond/foreign currency bond/ share purchases.
Too little, too late
Commenting on the policy reversal, Adewale Adepoju, a financial market analyst said the decision ought to have been taken before now even as he wondered what difference it would make in the short, medium to long term.
Why government must remain committed to policy ideals ideas
While attempting a prognosis of the forex scarcity conundrum, Dumebi Oluwole Senior Analyst at Financial Derivatives Company Ltd, noted that with the demand for forex on the back of forex pushbacks, it was only inevitable to see the descent of the naira.
Capital market stakeholders optimistic Cardoso’s CBN ‘ll engender balanced growth
Oluwole, who spoke in a monitored television magazine programme on Channels TV on Thursday said, what has happened in recent times is the result of the currency racketeers who continue to mount pressure from their side with the expectation that the naira would fall a lot more and they would gain and make profit off that.
“It just takes anybody to approach a commercial bank for a dollar and you will see a spike in the process of the dollar.”
“There is still that overarching thing that has to do with the monetary policy as well. When we go back to the fundamentals of economics, you realise that monetary policy comes to play when you look at price stability and we have seen that price stability is not only about inflation, it also constitutes the exchange rate as well.
“The fact is the exchange rate does a lot more for an economy than just what your currency is. It’s a very huge thing for investors. The exchange rate does tell a lot about the attractiveness of our economy to foreign investors.
“So if the currency continues to fall or continues to depreciate in value, foreign investors will definitely factor that in before lending you money. For instance, if you venture into the international debt market, it’s one of the things that will be used against you when you try to get loans and all that. Of course, for credit down raisers, this is one of the things that feeds into that.
“When you look at it from a macroeconomic perspective, what your exchange rate devaluation continuously does is that it increases inflation. So, there is a dynamic connection between the exchange rate and how it feeds into the inflationary pattern of your economy.
“Besides, it makes your foreign debts more expensive. So the debts that we are looking at right now for Nigeria in dollar terms is becoming more expensive and what that further does is that there is now another risk of payment priced into the economy when investors or business owners are looking to set up shop or even bring in their funds into the economy.
“There is also what it does for government revenue. So, if you’re not earning as much in dollar terms, in naira terms, it means that your money is also small.”
Derisking the CBN
While noting that the Monetary Policy Committee (MPC) meeting was postponed, a development she considered a risk in itself, Oluwole said there is need to take care of the forex backlogs and several other things.
“There are lots of balls juggling at the same time and the new CBN governor does have his job cut out for him. The question now however is what needs to be prioritised because inflation is spiraling, the naira is also devaluing very quickly and a lot of these uncertainties are what are also being priced into the devaluation of the naira.
“What does that tell you? What that means is that a lot of market sentiments are not in favour of Nigeria right now and we need a quick fix. This is more than what press releases and mere official statements can take care of or that can instill that investor confidence or that can encourage people not to keep hurting the naira.
“We have done the reforms but they have to continue with them; if not what we’re seeing is that the reform momentum is literally going down and we need to bring that back up.”
Citing the experience of the 1997 Asian crisis which led to a rippled negative effect on the continent’s economy, Oluwole said the need to avert similar crises happening around here is a bounden duty of some sort.
“If we allow things to get out of hand, with the exchange rate crisis we’re seriously battling with, it’ll take a lot of time to solve the damage. We started the reforms, we need to stick to it.”
Way forward
On the way forward, Oluwole said that things like restrictions on forex importation should stop.
“Nigeria is not yet self-sufficient and the more we’re not able to fix our agricultural productivity, the more we need this importation. We need these goods to come so that prices are able to stabilise to an extent.”
According to her, “If we were producing enough, then the conversation around the import substitution model for fiscal policy will be a lot more credible and will make a lot more sense. But right now, we’re not producing enough. Our farmers are struggling, and we’re also struggling as well.
“We have lots of issues to resolve so that businesses can be fixing and creating jobs that we need to increase the national output.”
Ideally, she said that the role of the government or fiscal policy in general is to create that positive environment for businesses to thrive.
Thankfully, she said “That is what we call the private sector-led economic growth and for which the President Bola Ahmed Tinubu-led administration has been committed thus far. We just need them to do a lot more because there is no time to waste time.”
Somewhat justifying the need for unwavering commitment on the part of the government, Oluwole said, “When you take on reforms, the implication is that your economy will definitely be hard hit.
“Consumers demand will fall especially and Nigeria being a highly consumption based economy the worst is expected to happen.”
Expatiating, she said, “when you look at our national income accounting, it’s the output that determines everything including consumption, government spending and the net export.”
While reiterating that in Nigeria’s income accounting, consumption alone accounts for 70 percent of the total, a situation she said is bad.
“Before you take into account investments, government expenditures and then the net export, if consumer demand continues to fall simply because prices are spiralling with manufacturers facing tough choices, the expectation is that the consumer demand will continue to dwindle.”
More worrisome, she said, is the fact that income brackets are shrinking very fast to the point that there is almost no middle income class, the signs are indeed ominous.
“Right now, it’s either you’re rich or you’re poor, especially when you convert what you earn in dollar terms. That’s when the reality of what your income comes into play or when you take the money you earn to the market to buy something.”
How to revive the naira, by Lemo
Miffed by what he described as the rippled adverse effects of the free floating of the naira, a former deputy governor of the CBN, Dr Tunde Lemo, has suggested a complete paradigm shift.
Speaking during an online discourse at the Boiling Point Arena penultimate Sunday, with the theme, ‘Persistent unstable macro-economic environment: Any way out’, Lemo said, “Naira should not be floated today. How many currencies are on free float in the world? Apart from the currencies that are internationally convertible, dollar, Euro, and maybe Japanese Yen. Even the Chinese Yuan is managed.
“Why would anybody just say that we should free up naira when we don’t have the reserve level, when we have trade and balance of payment deficit? I think that is a fast way to suicide.”
Lemo said that the apex bank must clear the backlog in the foreign exchange market in order to restore confidence and shore boost naira value.
He said, “One other thing that they need to do is the new team at the central bank needs to restore confidence in the currency market. All these, while they are issuing circulars, banning this product and so on and there is no clarity about the market dynamics, all of these means that the participants in that market will not be rational, and once confidence is lost, how do you bring it back?
“They have been defaulting. Most of the commitments have not been met. You know there is a backlog of about $6.8bn of swap deals, forward deals and commitments by airlines and so on that are not met. They need to clear all of this to bring confidence back into the market.”
Nairagram to the rescue
Nairagram, a licensed International Money Transfer Operator, has said it is partnering with the CBN, Sebastian BDC, and Keystone Bank to tackle the foreign exchange liquidity crisis in the country.
In a statement by the firm, there are plans afoot to work with international payment service initiative to enhance financial connectivity.
The statement read, “In collaboration with the CBN and in partnership with Sebastian BDC and Keystone Bank, this service addresses FX liquidity challenges in the country by simplifying and enhancing the process of sending money from Nigeria globally, thus fostering financial empowerment for Nigerians.
“This new international payment service symbolises Nairagram’s unwavering commitment to innovation that enables bonds of kinship, foster community and drives wealth creation through hassle-free remittance overseas.
“It stands for more than just a money transfer service. It represents the brand’s commitment to the African success stories empowering African economies, transcending borders, and creating opportunities for financial inclusion.”
Source: The Nation
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