Has the Central Bank of Nigeria (CBN) lost the battle to rescue the naira? This is the question many are asking as the currency continues to depreciate despite CBN’s efforts to stabilise it, writes COLLINS NWEZE.
Ahead of next month’s elections, increased political risk, falling oil prices and lack of interest in investors’ frontier assets have put the naira under pressure.
The naira has depreciated to an all-time low of 188.48 against the dollar. Last week, the currency was 3.5 per cent down, the lowest since November 14.
This has depleted the foreign reserves. Policy makers are contemplating either to allow the currency to move in a wider range against the dollar or raise interest rates.
But the Central Bank of Nigeria (CBN) Governor Godwin Emefiele has promised to stabilise the currency without following either routes. He listed some of the challenges he is facing defending the naira, adding that the naira/dollar exchange rate has been under pressure over the last couple of months.
Explaining the difficulties in managing exchange rate stability, the CBN boss raised a poser: “What then can a Central Bank do to react to such a situation of falling reserves and pressurised exchange rates?
“One course of action would be to continue to deplete the foreign exchange reserves in trying to keep the official rate at a stable level. But there are several difficulties with this option.”
He said regardless of its critical nature in an import-dependent country such as Nigeria, the exchange rate operates like any other ‘price’ in the market.
The dollar/naira exchange rate is simply the ‘price’ of dollars in naira. The forces of demand and supply, he said, determine its movement. “When demand rises, the price rises. When supply falls, the price also rises as well. In recent times, Nigeria has faced a perfect storm of simultaneous dwindling supply of dollars and rise in demand. Both forces have led to a rise in the price of dollars, that is, significant reduction in supply of dollars to the market, even with constant output of crude oil production,” he said.
The other global factor, which has significantly reduced the supply of dollars in the market is related to the end of Quantitative Easing by the United States (U.S) Federal Reserve. At the height of the programme, the Federal Reserve was supplying a total of about $85 billion into the U.S economy on a monthly basis, through asset purchases. This programme came to an end in October last year, thereby significantly reducing the supply of U.S dollars in the global economy.
Another difficulty which has contributed to the continuing depletion of Nigeria’s foreign reserves, and its capacity to defend the naira is that the combination of a fall in oil prices and the end of the Quantitative Easing programme by the US Federal Reserve have led to a depreciation of most currencies in the world against the dollar.
Emefiele said an analysis of the year-on-year change in the exchange rate of 26 Emerging Market countries (including Brazil, China, India, South Africa, Turkey, Mexico, and Nigeria) indicates that their currencies have depreciated by about 8.1 per cent on average against the dollar.
Steps taken by the CBN
The CBN has directed that all importations involving electronics, finished products, information technology, generators, telecommunication equipment, and invisible transactions will henceforth be funded from the interbank foreign exchange market only.
In a circular to all authorised dealers, CBN Director, Trade & Exchange Department, O. I. Gbadamosi told stakeholders that the policy was to maintain the existing stability in forex market and strengthen the various policy measures, already initiated by the CBN.
On the development, Head, Africa Strategy at Standard Chartered in London, Samir Gadio, said: “The importation of electronics, finished products, information technology, generators, telecommunication equipment, and invisible transactions importations shall henceforth be limited to the interbank market only.
“We’re seeing more foreign-exchange flexibility. Perhaps they do not want to burn FX reserves unnecessarily. It’s a risky strategy though as the market will now look for the topside of dollar-naira and also because the lower rates will reduce the incentive to hold naira fixed-income assets.”
BDCs policy
On June 23, last year, the CBN, among other things, raised the minimum capital requirement of BDCs to N35 million from N10 million. It raised the mandatory caution deposit to N35 million from $10,000.
Again, on July 7, the apex bank extended the deadline from July 15 to July 31, in response to appeals and intervention of Association of Bureau De Change Operators of Nigeria (ABCON)and both chambers of the National Assembly.
In a circular, CBN’s Director, Financial Policy and Regulation, Kelvin Amugo, said interest would be paid on the mandatory caution deposit of N35 million, based on the savings account rate. The CBN, Amugo said, would, on expiration of the deadline, cease to fund any BDC that failed to comply with the fresh requirements.
Meanwhile, the CBN had given approval to additional 102 Bureau De Change (BDC) operators, bringing the total to 2,544 since the recapitalisation deadline lapsed in July.
The apex bank had last August, published a list of 2,442 licensed BDCs, which it said, had complied with its new capital requirements of N35 million as at July 31, last year.
There were 3,208 registered BDCs before the expiration of the deadline. The CBN had in June announced a new minimum capital requirement of N35 million for the operation of BDCs, up from the N10 million.
To ensure that the forex dealers comply with the new capital requirements, the CBN had extended the deadline to July 31, last year. The forex dealers were previously given a deadline of July 15, last year. The apex bank had also stated that interest would be paid on the mandatory cautionary deposit of N35 million, based on banking industry savings account rate.
It, among other requirements, also reviewed the mandatory cautionary deposit for BDCs upward to N35 million. The regulator had pointed out that on the expiration of the deadline on July 31, last year, that it would cease to fund any BDC that failed to comply with the new requirements, adding that “only BDCs that meet the new requirements would qualify to be engaged as agent by the licenced international money transfer operators for inward and outward transfer business in Nigeria.
Dollar sales to BDCs slashed
The CBN has cut dollar sales to BDCs by 70 per cent from $50,000 per week to $15,000.
The N35 million caution raised from $20,000 represents a 1000 per cent hike among other conditions set by the apex bank in its June 23 guidelines for the subsector.
Managing Director, Kayewd BDC Limited, Rotimi Dada, who confirmed the new dollar sales to BDCs, said the action has cut dollar supply to the market, and reduced profit margins for operators while the overhead costs remain the same.
Speaking on the sideline of the ABCON public hearing in Lagos, he said operators had rents to pay, adding that they are not able to meet market demands for the dollar which is bad for the market. He said there is a multiplier effect of the policy, which makes it difficult for operators to buy dollar from commercial banks.
Dada said the CBN was acting a bit hasty by cutting the dollar sales to BDCs and that the regulator should consult with stakeholders on what needed to be done. He said the CBN should see the BDCs as macroeconomic factors that favour the economy.
Complex crises get worse
The misfortune of the naira seems complex. The thinking is that massive inflow of forex from surging oil prices and the boom in the capital market were responsible for the appreciation of the naira in the past few years. Unfortunately, oil prices have nosedived and Nigeria capital market is in a shambles. The fall in the price of oil has major consequences on government revenue, aggregate output, capital formation investment, employment, trade and fiscal balance.
The 2008 global financial meltdown also contributed to naira’s freefall. Chief Executive Officer, Financial Derivatives Bismarck Rewane, said Nigeria was unprepared for the shock. “The Nigerian economy believed to be one of the most resilient in the world was caught unawares by the global crisis,” he said.
Analysts said a gradual appreciation of the currency will require building confidence in the financial system and price of crude oil in international market. This is what is going to drive the exchange rate now and beyond. We cannot isolate what is happening in the global economy like the issue of diversification of energy sources.
Policy makers speak
Sub-Saharan Africa Economist at Renaissance Capital and co-Author of the Fastest Billion Yvonne Mhango said the CBN has shown absolute commitment to dealing with dwindling fortune of the naira.
The official devaluation of the naira, she said, allows the Retail Dutch Auction System (RDAS) to move within the range that straddles the interbank foreign exchange rate. “While the market reaction to the RDAS move in the near-term will be important, we think that these measures deal as comprehensively as possible with the challenges facing Nigeria.
“While Nigeria cannot do much to influence the oil price, the combination of measures sends a powerful signal to all stakeholders on the CBN’s intent to do what it can to preserve macroeconomic stability,” she said.
Head, Equities Market at FBN Capital Olubunmi Ashaolu said the CBN has by the policy, set clear cut objective on its monetary policy direction. He said the stock exchange positive reaction was an indication that local and foreign investors now understand where the naira is heading. “As long as there is clarity and good investment climate, the equities market will benefit,” he said.
He advised government to improve infrastructure, noting that such action would make Nigeria’s investment climate more attractive for foreign investors.
Rewane said the MPC’s decision has reinforced the CBN’s independence and autonomy.
He said the currency adjustment has a direct impact on the cost of imports and may undermine the MPC’s efforts at ensuring price stability in a hugely import-dependent economy. The devaluation, he added, would slow down external reserves depletion. “Since the naira is closer to equilibrium, the need to intervene will be less,” he added.
To the President of National Association of Small Scale Industrialists, Chukwu Wachukwu, there are consequences wherever currencies are devalued. He said the naira devaluation would make government to jettison its sole reliance on oil and pay attention to other sectors of the economy. “We can’t just continue to depend on oil, we need to diversify,” he said.
