21 February 2016, Lagos — In what is becoming increasingly clearer, a cocktail of bad choices, incoherent policies made worse by instability in the markets, as well as a fastidious clinging to antiquated ideas, the fate of the Naira hangs in the balance as it continues its downward slide.
This report will show why the Muhammadu Buhari administration’s misplaced belief that hope is best served for dinner, at a time when there may be no one at the table because the prognoses for the Naira and the economy, do not inspire confidence and growth.
Sustained, unmet demands during the week, forced the Naira to depreciate to a record low of N385-N400/ US$1.00 at the weekend, showing an unprecedented week-on-week decline of 13.8 per cent in the parallel market.
Central Bank of Nigeria, CBN, had intervened with supplies of the foreign currencies on Thursday at the interbank market where banks buy foreign currencies at the official rate of N197/ US$1.00.
Unfortunately, market dealers lamented that the volume supplied was too small to meet the demands presented by the banks on behalf of their customers.
They told disclosed that the development prompted frenzied recourse to the parallel market by some dealers and their customers the next day, crashing the fragile Naira further.
The dealers are raising fears that the decline would continue into the new week as there appears to be no response to the trend yet from the monetary authorities.
One of the BDC operators and President of BDC association in Nigeria, Aminu Gwadabe, said: “we have demand from importers while dollar supply has dried up”.
He had also told Reuters, “In my own view, the central bank should address the supply side of the market by allowing oil companies and banks to sell dollar to Bureau de Change operators as an immediate measure to reduce pressure on the Naira”.
Some financial market observers believe that the exchange crises is now complicated with malpractices spreading beyond the initial allegation of CBN that it was the BDCs that were involved in arbitrage, an allegation which was followed by a ban on their participation in the CBN foreign exchange sales at the official rate last month.
Operators believe CBN’s intervention in the interbank segment would not be able to stem the slide in the value of Naira in the parallel market unless the apex bank increases its volume of foreign currency sales and possibly revert to daily sales instead of once a week intervention.
This claim fuels speculations that, somehow, even the foreign currencies sold to banks by CBN find its way into the parallel market.
Economists and financial analysts views:
Commenting on the state of the Naira, Bismark Rewane, one of Nigeria’s eminent economists and CEO of Financial Derivatives Company, a Lagos-based financial advisory outfit, said “Nigerians are perplexed at the endless slide of their currency, which is now trading at the lowest point ever.
This is happening even when the oil price is up at $31 barrels per day. “The debate, whether to devalue the Naira or not, is not the real issue. The discourse should be whether we need an exchange rate policy or not.
“The absence of a policy is a recipe for economic anarchy and a race to the bottom”. John Litwack, World Bank’s Lead Economist, argued that trying to hold on to the exchange rate when the economic fundamentals have moved can be counterproductive as the country may end up losing a lot of reserves.
For Mr. Temitope Oshikoya, CEO/Chief Economic Strategist, Nextnomics, “official devaluation may not be the answer to adequate dollar inflow”. According to him, “we have heard countless of time that capital inflows are just waiting in the wings to pour back in if only Nigeria would devalue its currency.
Recent evidence from emerging markets suggests that they should go and tell that to the marines! “We note here that in contrast to perceived wisdom there is no guarantee that capital inflows would surge into the country following further massive depreciations.
“For many emerging markets, where depreciations have been considerably greater, weakening exchange rates have aggravated current problems associated with rising foreign-currency debts.
“But, thus far, there is little to suggest that the depreciations have had much of a salutary effect on economic growth, which for the most part has remained sluggish.”
Financial institutions’ and investment houses’ perspectives: We expect CBN to change policy –
GTBank In its financial outlook for the currency market in 2016 one of Nigeria’s leading commercial banks, Guaranty Trust Bank Plc, had this to say: “In recent times, the CBN has introduced some policies in a bid to address the issues of speculative foreign exchange demand and round-tripping.
“Given the forecast that oil prices are set to fall below present levels, which would result in a further decline of external reserves, we believe that the CBN’s stance might not hold on for the entire year.
“If oil price declines further and stays below $40 per barrel for a protracted period of time, say 6 months, we expect that the CBN might be compelled to devalue the Naira”.
Pressures will push up inflation – Afrinvest Group Reacting to the latest developments in the foreign exchange market last weekend, Afrinvest West Africa, a Lagos-based investment house said “owing to the stance of the CBN and the federal government on foreign exchange adjustments, the increase in speculative activities at the less-regulated segments of the market and widening spread between the official and parallel market rates may not likely generate any reaction from regulators in the short term.
“However, the mounting demand for foreign exchange as shown in the huge decline in money market liquidity when banks made provisions for Thursday foreign exchange auction suggests an adjustment may be unavoidable in the medium term.
“Speculative activities may not likely reduce until more certainty and transparency are brought to bear on foreign exchange management.
“Going forward, the challenge of greater import costs on businesses is expected to further impact both the core and food inflation rates as cost push factors weaken operating margins amid demand pressure in the foreign exchange market”.
IMF may force devaluation on CBN – Cordros Capital
In its review of the currency outlook, analysts at Cordros Capital Limited, a member of the Nigerian Stock Exchange, said “a combination of weak commodities and the US Fed’s tightening cycle has not fared well for the Nigerian domestic currency in recent times.
“The Naira has declined against the US Dollar for two successive years in the official market. During the period, the Naira has also experienced significant pressure in the parallel and BDC market segments, reaching record lows.
These declines have occurred in the face of the country’s weakening fundamentals, primarily the crash of crude oil prices since 2014, which used to represent as much as 90 per cent foreign exchange receipts, putting enormous strain on the country’s reserves which declined by 15.1 percent in 2015.
“Furthermore, the country’s ability to attract foreign exchange inflows has been constrained by the implementation of the cocktail of restrictions on foreign transactions by the CBN and the divergent monetary policy in the face of the US Fed’s tightening cycle which has weakened the attractiveness of the domestic portfolio investments to foreign investors.
“In 2016, we forecast a further decline in the Naira across all major market segments, following consensus estimates for lower oil prices and further Fed tightening.
In the meantime, we believe the CBN will double down on its demand management strategies in the short-term.
“However, while the pace of reserve depletion has reduced in recent months, lower crude oil prices should translate to lower receipts and accelerated depletion of reserves in half year 2016.
“Consequently, we believe as the reserves continue to deplete and the current account deficit begins to widen, the CBN would begin to revisit its exchange rate peg of 197/$.
“Unfortunately, we believe any exchange rate adjustment will be uncompetitive, given the ongoing dynamic between monetary and fiscal authorities. The fiscal authorities, spearheaded by the President, seem hesitant to endorse devaluation.
“Aside from fundamental drivers which may push the CBN to adjust its foreign exchange policy, we believe that the barrage of international pressure might eventually sway the CBN.
“For instance, given the size of external debt the FGN outlined, we believe that it is unlikely they plan to raise all from the Eurobond market, rather through a combination, from multilateral institutions and bilateral arrangements.
“Any borrowing from a multilateral institution such as the IMF will involve some agreement to revisit the current exchange rate policy. “Also, Nigeria foreign exchange policy has come under opposition from other trading partners (US and EU) at the World Trade Organization (WTO)”.
Low reserves, oil prices will force policy reversal on CBN – Dexter Analytics
After an analytical overview of how Naira got to its sorry state in the past one year, Dexter Analytics, a Lagos-based economic and financial research company, had these to say concerning the present and future state of the Naira: “In 2016, we expect that the CBN will relax some of its grip on the currency so as to bolster growth.
“As it stands, the CBN cannot afford to fund cheap dollars due to the present level of reserves ($28bn) and oil prices ($30/bbl).
To confirm this, in just two weeks into the year, the CBN has reversed a policy that restricted deposits into domiciliary accounts and has stopped sales of Forex to BDCs, urging them to access dollars from autonomous sources.
“Thus, we posit that the CBN will likely relax its management of the currency by half-year 2016, which of course indicates greater burden for businesses and individuals who rely heavily on importation.
“On the flipside, it would help stabilize the Naira and curb round-tripping through alignment of the official and parallel market rate”.
Those benefiting from Naira crash It is not all woes to all stakeholders in the Naira debacle. The widening premium between the parallel market rates and the official/interbank rates have increased the activities of speculators and round tripping further worsening the currency situation.
According to Nairametrics, Nigeria’s leading online investment and financial medium, “it’s not just speculators who have benefited the most from the misfortunes of the Naira.
Several other market participants are also benefiting every single day the Naira plummets against the dollar at the parallel market”.
At least four groups have been identified with making fortunes from this misfortune. They include “diaspora Nigerians, banks, BDC operators and friends and cronies of some top CBN officials”, stated Nairametrics.
This is perhaps the best time to live and work outside Nigeria especially if your income is in dollars.
Nigerians living abroad reveal that they have started part-time currency business involving trading their dollar or Pounds Sterling income for Naira at the black market rate with which they invest in real estate in Nigeria.
Some of them even borrow cheap funds in hard currency for the purpose of this transaction.
According to Nairametrics, “some believe this is the best opportunity to buy land and houses as the value of the dollar have now risen by about 70% against the Naira while property prices have been somewhat depressed”.
In addition, the diaspora Nigerians have been doing a quasi-money transfer services to other Nigerians whose children are abroad following the restrictions imposed on such transfers by CBN last year.
They charge fees or effect the transfers at parallel market rates. Commercial Banks have been under pressure since the price of oil began its devastating fall in July 2014.
With huge exposures to the oil and gas sector they have seen their loans increasingly become risky with borrowers missing out on their obligations.
However, they have also posted massive gains from foreign exchange sector of their businesses as can be seen in their income statements at the end of the financial year 2014 and the first 9 months of 2015.
Most people who purchase items online have also confirmed that banks charge them as much as N290 to the dollar even though the CBN pegs the rate at around N199.
Besides, banks’ staff also take advantage of the scarcity of the hard currency to force foreign exchange users especially importers to pay close to the parallel market rate for foreign currencies obtained from CBN.
They ask the customers to pay two cheques, one to the bank covering the official rate and the other to designated bank account covering the difference.
These are another big benefactors of Nigeria’s foreign exchange woes. The CBN in January banned the sale of foreign exchange to BDC operators accusing them of buying foreign exchange from the CBN at N199 and then selling at the black market.
According to the CBN, it’s no wonder that BDC has risen from a mere 74 in 2005 to 2,786 BDCs today. In addition, the CBN receives close to 150 new applications for BDC licenses every month.
Even after the ban, BDCs are still thriving in many commercial cities in Nigeria as they have a way of sourcing the currencies from leakages in the CBN official window and diverting same to the black market for over 70 percent profit margin.
Exporters Businesses engaged in exports are also huge benefactors of the declining exchange rate.
Revenues from their exports officially should, naturally, be routed through the CBN as export proceeds.
However, it is understood that some of them move a chunk of that to the black market. With gains as high as 80 percent, most of them find it hard to resist the lure of selling their hoard at the black markets rather than at the official window, even though that practice violates the exchange law.
Friends and associates of the CBN Nairametric’s report also suggest that people close to the management of the CBN or indeed the government are also befitting from the fall of the Naira.
They get preferential treatment from the CBN by buying at official rates rather than at the black market rates patronized by lots of Nigerians.
The CBN has also expressed its desire to sell foreign exchange to businesses it perceived are creating jobs at home rather than to cater for “irresponsible demand” which the CBN opines are what other importers of “nonessential” goods and services engage in.
For the coming weeks, the outlook remains bleak except the Federal Government of Nigeria, through the CBN, acts fast – and wisely too.
*Emeka Anaeto – Vanguard