Bumpy road ahead for naira over hazy indicators

The next three months will be tough for the naira against foreign currencies. The impact of the weekly dollar interventions by the Central Bank of Nigeria (CBN) at keeping the naira stable in the official and parallel markets is likely to wane in the months ahead in the face of new challenges. The rising election spending, drop in crude oil prices and exit of portfolio investors point to looming trouble. COLLINS NWEZE captures the state of the local currency and CBN’s measures to protect it.

A currency speculator, Abdulkadir Tule, was preparing for the Zuhri (2’oclock) prayer when he got a text message on naira’s sudden fall against the dollar.

His business partner, Abubakar Ahmed, had on Thursday November 29, informed him that the naira was exchanging at N370/$ in the parallel market. It was the local currency’s lowest position since August last year.

Tule was not moved by the information since the local currency has remained stable for over a year, reducing transaction margins for speculators.

But the information was a reminder that the naira was again faced having major stability challenge that could ignite the February 2017 debacle when it exchanged at N520/$ at the parallel market.

To speculators like Tule, who buy dollars for keep and resell when it appreciates, the foreign exchange (forex) business has become nightmarish due to Central Bank of Nigeria’s (CBN’s) weekly dollar interventions that have prevented the naira from drastic fall.

The naira has been exchanging at N306/$ in the official market, but at the parallel market, it is likely to face major volatility challenge in the months ahead.

The weakening of the naira at the parallel market has been linked to drop in crude oil prices due to oversupply. The opening up of the campaigns for parties ahead of the 2019 general elections by the Independent National Electoral Commission (INEC) has also affected the naira’s position as spending is expected to rise. These occurrences are deterring foreign investors from bringing in dollars, traders claimed.

Global prices of oil have dropped more than 20 per cent this month. Traders fear that the CBN may not have enough reserves to defend the currency against a possible further weakening of oil prices as foreign investors have been pulling money out of her local assets and new investments are not coming.

The CBN has been using up foreign exchange reserves to keep the naira stable, spending $2.2 billion in October to prop up the currency as investors have also abandoned the market for rising interest rates in developed economies.

An economist, Bismark Rewane, explains why the naira is on the downside. “As oil prices dipped, the CBN has prioritised stability of exchange rate in the official market. It has drawn an exclusion list of avoidable imports from being funded in the official market. With the foreign exchange demand for the items transferred to the parallel market, rates in that market have soared”.

Besides, other factors like terms of trade, inflation differential, public debt, current-account deficits, interest rates, political stability and the overall economic health determine the exchange rate of a currency.

The fall in crude oil prices has reduced the country’s dollar earnings, making it difficult for the CBN to fund imports. Record oil prices had helped Nigeria to build the largest currency reserves in sub-Saharan Africa. The reserves peaked at $63 billion in September 2008. But, after attaining a record-high of $147 in July of that year, Nigeria’s crude oil prices – bonny light, have plummeted.

As at December 2, oil was trading below $59.52 per barrel and the foreign reserves level has declined to $44 billion, $19 billion lower than the September 2008 figure.

A CBN data showed foreign reserves stood at $41.9 billion as of November 27, down 12.3 per cent from a peak of $47.8 billion reached in June.

A large chunk of the reserves went to Bureaux De Change (BDCs) operators as weekly allocations to help close the rising gap between the official and parallel market rates. The 4,000 BDCs got $20, 000 weekly from the International Money Transfer Operators (IMTOs) and will from December 6, get additional $15,000 weekly from the CBN, to in line with the new cash sales plan to address rising dollar demand during the Yuletide.

Today, oil sits at $59.52 a barrel, but the Organisation of Petroleum Exporting Countries (OPEC) predicts the price won’t return to above $100 until 2040. This forecast has continued to put the naira under severe pressure from internal and external factors but the CBN is not giving up.

Analysts said dollar shortages could worsen, as investors close their books for the year unless the CBN increases its intervention in the forex market. The CBN has been raising treasury yields to lure offshore funds.

Head Currencies Market at Ecobank Nigeria, Olakunle Ezun, said the forex market has lost its drive for profitability and is no longer exciting for players. He said the boom time for forex dealers was over after the CBN kept its dollar intervention promises.

Ezun said: “In terms of forex business, it is not as exciting as it used to be. What makes the market exciting is volatility. The operators are not always happy when market becomes stable, because their profit margin drops. The profit-taking opportunity in the market is very lean at present and so are the turnover and spread.”

The local currency crisis was triggered by the dip in crude oil prices, which adversely affected, he said, foreign reserves and created acute dollar shortages. To curb these dollar shortages and stabilise the naira against foreign currencies, the CBN regularly pumped dollar into the market to narrow the margin between the official and black market rates. The measure has not only led to convergence between the parallel and black market rates, it has chased speculators out of the market.

CBN’s plan to save naira

The CBN has imposed some currency control measures to save the naira. In June 2016, it curbed access to the interbank currency market for importers bringing in a variety of goods. In an effort to conserve its dollar reserves, the bank said importers could no longer get hard currency to buy 41 items, ranging from toothpicks and rice to steel products and private jets.

Other measures it took include the first Naira-Settled Over-the-Counter (OTC) Forex Futures Market (FFM) launched with FMDQ OTC Securities Exchange and the planned resumption of dollar sales to the BDCs.

The FMDQ OTC Securities Exchange (FMDQ) is an organisation with the strategic intent of bringing about revolutionary changes and fostering the development of the financial markets.

The Naira-Settled OTC Forex Futures are non-deliverable forwards, or a contract where parties agree to an exchange rate for a pre-determined date in the future, without the obligation to deliver the underlying dollar on the maturity/settlement date. On the maturity date, it will be assumed that both parties would have transacted at the spot forex market rate. The party that would have suffered a loss with the spot forex rate will be paid a settlement amount in naira to ensure that both parties enjoy the rate that had been guaranteed to each other through the OTC Forex Futures.

FMDQ’s Managing Director/Chief Executive Officer Bola Onadele Koko said: “The Naira-Settled OTC Forex Futures product is a major milestone development in the evolution of the Nigerian financial markets. The Futures market is an opportunity to transform risk into certainty – a major paradigm shift in the financial markets landscape.

“This innovation offers opportunities for government, businesses, pension fund administrators, investors and individuals among others to hedge (not speculate) to cope with exchange rate risk.”

Association of Bureaux De Change Operators of Nigeria (ABON), President Aminu Gwadabe, said other measures initiated by the CBN including the sustenance of dollar supply to over 4,000 BDC operators across the country through the MTOs forex window have helped the naira, he noted.

ABCON has ensured that its members continue to make dollar accessible to critical end-users like travellers demanding personal and business travel allowances, school fees and medical bills payment among others. He said the operation of IMTOs was part of the CBN’s efforts to liberalise the forex market, boost liquidity and make dollar more readily available to low end users.

He said although declining global oil prices should fundamentally lead to massive depreciation, the CBN’s’ commitment to the defence of the naira keeps providing stability for exchange rates at different segments of the forex market.

Gwadabe said the coming of Investors and Exporters (I&E) Forex Window, was also part of CBN’s efforts to further develop the Nigerian forex market and improve market structure.

But, an executive of the Rockview Integrated Limited, Michael Azu, said the sharp rises in the dollar exchange rate were in the parallel market as the volatility has not extended to the official market where the most economically important transactions are funded.

“Although the dollar exchanged for N370 at the BDC, the dollar has continued to exchange at N306 to dollar since March 2016,” he said.

To him, the CBN has taken a position – backed by the administration of President Muhammadu Buhari – which is to protect the official market from speculation and damaging devaluation.

“But the reality is that, as a people, we have to make adjustment in our tastes. Not only should we be ready to replace foreign products with local substitutes; we must be prepared to let go of some exotic products, even where there is no direct alternative. It is part of the demand of building a virile country and a sustainable economy,” he said.

Why crisis persists

Rewane believes that besides the dwindling crude oil prices and reduced forex earnings, the CBN’s decision  to peg the naira in the official market, resist further devaluation, lower interest rates and increase credit to the real sector has heightened the exchange rate crisis.

Although pundits’ debate whether the naira is overvalued or undervalued, the real issue is that the CBN’s control of the currency prevents it from being responsive to economic fundamentals. “While every economy is controlled in some way, the CBN’s refusal to allow the exchange rate and other relative prices adjust to terms of trade shocks, seems to be disrupting the country’s fundamental economic structure,” Rewane said.

To him, the sharp decline in oil prices has created trade shocks experienced by many oil producing countries and this has led to the readjustment of most emerging market currencies.

But, this is not the first time Nigeria has suffered from an overly controlled currency. From 1981 to 1985, during a similar period of control and oil shocks, relative prices did not adjust to restore internal and external balances. This led to low production, economic distortions, massive retrenchment and poverty.

In contrast, from 1986 to 1991, when the Structural adjustment Programme (SAP) was introduced, the exchange rate was flexible. Economic data showed that there was increased output, better employment figures and less poverty. Both periods had negative oil price shocks.

CBN’s take on naira

CBN Deputy Governor (Corporate Services) Adamu Edward Lamtek in a personal statement at the Monetary Policy Committee (MPC) meeting released by the CBN confidence in the economy, said  was building as the naira exchange rate continues to be stable and the premium between the BDC and interbank market segments narrows.

“The parallel market premium continues to shrink as legitimate foreign exchange transactions migrate to the formal market. It does, therefore, appear that the bold reforms of the Central Bank on forex policy and in the foreign exchange market in 2016 and 2017 are paying off. It is gratifying that the benefits of these reforms have stretched beyond the stability of the naira exchange rate,” he said.

Stakeholders’ stand

CBN Governor Godwin Emefiele called for a change of lifestyles by Nigerians to sustain naira’s recovery against the dollar. He said the size of Nigeria’s reserves and the value of the naira critically depend on our lifestyles and on the value and types of imports we allow into the country.

But, to speculators, stability in the forex market is bad news anyday. They prefer volatility which makes them to declare more profits.

Afrinvest West Africa Plc Managing Director, Ike Chioke, believes the incorporation of a long-term diversified strategy in fiscal policy is required to cushion shocks in various segments of the economy.

For him, the persistent pressure on the naira could have been minimised if a counter fiscal policy had been developed, as the CBN cannot continue to defend the naira with foreign reserves.

“To reduce this pressure, an inward looking policy (tax incentives, infrastructure development and production subsidy) should be emphasised to reduce the dependence on imported goods”, he said in emailed note to investors.  He explained that asides from oil receipts, the development of the Agricultural sector will in the short term reduce the forex burden of food imports and on the long run, enhance foreign receipts if its comparative advantage in the sector is efficiently deployed.

Gwadabe said the country has not been able to build strong buffers to protect the economy against shocks as done in other climes.

He said: “The United Arab Emirates has over $400 billion in their reserves and that is a very big buffer for them as it protects their local currency at any given time and that is what I would want to see in Nigeria. Don’t forget that without the buffers, there is no way one can defend the local currency.”

“As a Nigerian, anytime I see the gap increasing, I’m worried and I say that this gap has to be reduced. The rising gap between both markets is fueled by compromise. Nigeria is an economy where you see compromise. Speculators are the biggest challenge facing the naira.

“Don’t forget that speculation is on its own a business. Once the CBN follows one road, they will find a way to frustrate the policy and ensure the survival of their business. But with increased transparency and liquidity, the activities of speculators will be reduced and volume of parallel market operators will also be reduced. We should move from the era of dollar allocation to think of how to bring in the dollars”.