Category: Equities

The naira at the weekend closed at N497 to a dollar in the parallel market, but remained at N306 to a dollar in the official market. The exchange rate crisis continues, despite the Central Bank of Nigeria (CBN’s) invervention to stabilise it, writes COLLINS NWEZE.

•CBN: lifestyles change key to recovery

The naira suffered a major setback at the weekend, as it failed to recover from N497 to a dollar exchange rate against the dollar at the parallel market. It was, however, stable in the official market where it exchanged for N305.5 to dollar while bureaux de change (BDC) rate stood at N399 to dollar.
Central Bank of Nigeria (CBN) Governor, Godwin Emefiele, reacted to the continued fall of the naira, calling for a change of lifestyles among Nigerians. He said in a new campaign shared by the bank’s spokesman Isaac Okorafor: “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.”
Emefiele’s message implied that a change in consumption pattern from foreign to indigenous goods would impact positively on the value of the local currency.
The liquidity crunch in the foreign exchange market persisted last week with an impact on the naira exchange rate against the dollar.This development continued, despite interventions by the CBN in the market to ease dollar scarcity. At the Interbank, the CBN continued daily dollar intervention to meet some dollar demands and also contain intra-day interbank rate movement on all days during the week.
Association of Bureaux De Change Operators of Nigeria (ABCON) President Aminu Gwadabe said 2,500 BDCs accessed $8,000 weekly dollar sales from the International Money Transfer Operators (IMTOs) fund.
“There is stability in the parallel market, and we are happy that the foreign reserves have been climbing to new heights. The rising foreign reserve is a comfort for the CBN and I can assure you that currency speculators have to be careful,” he said.
However, some stakeholders attributed the naira’s woes to CBN’s inability to fully liberarise the foreign exchange market and allow the naira to float.
But sub-Saharan Africa Economist at Renaissance Capital (RenCap), Yvonne Mhango in a report titled: Nigeria: Winds of change- More flexible Forex Policy, predicted that the naira would not be allowed to float on the interbank market.
“This view is informed by the partial deregulation of petrol prices on May 11, and Nigeria’s history of managing the forex rate. The ideal scenario would be for the CBN to let the market set the new interbank forex rate without restriction, and in so doing, allow for an appropriate level to be found,” she said.
Mhango predicted that consumption expenditure would continue to underperform (and weight on aggregate GDP in the near term due to declining real wage and thrifty consumers who are wary of uncertain economic outlook and also taking advantage of high interest rate environment to save.
“We believe policy measures to ease supply side shortages in the economy, particularly for forex, and subsequent easing of monetary policy will go a long way in stimulating investment and consumption spending to support aggregate economic performance and naira’s recovery,” she said.
Measures to strengthen naira
Some of the measures put in place by the CBN to end the crisis include the first Naira-Settled Over-the-Counter (OTC) Forex Futures Market (FFM) launched last June 27 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 Nigerian 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.
“It also affords the CBN a greater opportunity to manage exchange rate volatility, thus achieving greater market confidence, liquidity, improvement in business planning, job security, employment, better allocation of resources, global competitiveness of the Nigerian financial markets, and all in all, a thriving economy.”
Managing Director, Financial Derivatives Company Limited, Bismark Rewane, said the exchange rate has been a hot topic of debate in recent months, adding that this is not the first time Nigeria has suffered from an overly con-trolled currency.
Rewane said in an on-line report: “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, poverty and higher unemployment.
“In contrast, from 1986 to 1991, when the structural adjustment program 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.
“Nigeria’s current managed floating exchange rate regime combines features of both the fixed and flexible exchange rate. A lightly managed floating exchange rate regime is advocated given that the exchange rate becomes determined essentially by demand and supply forces, while allowing the CBN to intervene occasionally to moderate excessive fluctuations, which are prone in developing countries such as Nigeria.”
Besides, other factors, such as 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.
Managing Director, Afrinvest West Africa Limited, Ike Chioke said the naira recorded the worst performance of all asset classes, tumbling from 34.7 per cent and 46 per cent against the dollar in the official and parallel markets while also underperforming Emerging and Frontier market peers.
He calls for the incorporation of a long-term diversified strategy in the fiscal policy 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 could not 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.
He explained that aside oil receipts, the development of the agricultural sector would in the short term reduce the forex burden of food imports and enhance foreign receipts if its comparative advantage in the sector is efficiently deployed.
Head Currencies Market, Ecobank Nigeria, Olakunle Ezun said the solution was not in policy change but in boosting dollar liquidity. “There is a limit to how far a policy can support naira. Demand for dollar is huge because the economy is import dependent. A lot of industries still depend on importation of raw materials and finished goods making our import bills to go up. The CBN disburses about $600 million monthly to manufacturers and other real sector operators, representing about 25 per cent of the monthly demand of $4.8 billion,” he said.
Ezun said the CBN does not have the capacity to support the naira. “The only solution is for crude oil prices to rise. But that is beyond us. We are also contending with the Niger Delta disruption of oil production, which has also adversely affected dollar inflows,” he said.