Last week’s decision of the Central Bank of Nigeria (CBN) to scrap the Retail Dutch Auction System (RDAS) and focus on the Interbank Foreign Exchange (IFEX) market has generated reactions from stakeholders. Although the apex bank acted to save the naira and foreign reserves against falling oil prices, many people doubt that this measure will do the magic in an import-dependent economy like Nigeria’s, writes COLLINS NWEZE.
DESPITE the scrapping of the Retail Dutch Action System (RDAS) by the Central Bank of Nigeria (CBN), the trouble with the naira may linger longer than envisaged.
The pressure on the foreign exchange reserves following falling oil prices is not helping matters.
Compounding the woes of the naira the market’s anticipation of the eventual unification of the different exchange rates.
It is expected that the RDAS exit, the window under which foreign exchange was previously available at a subsidised rate, will effectively be discontinued. Going forward, all demands for foreign exchange will be channelled through the interbank foreign exchange market instead.
The trouble with the naira has long been associated with political volatility and bad economic policies that encourage the government to spend more than its earnings.
The announcement that elections would be postponed to 28 March and April 11 subjected the markets to greater volatility.
The naira losses were so large that the CBN had to shutdown the foreign exchange market twice in on week, to save the naira.
While that lasted, the CBN intervened directly through special auctions, filling demand for foreign exchange directly, but at a much higher dollar to naira exchange rate than that prevailing at the then official window.
They craned their necks and stared as he made his way into a conference room in Lagos where an emergency meeting of stakeholders in the Foreign Exchange (FOREX) market was summoned on January 27 at the instance of the Central Bank of Nigeria (CBN).
The over 2,000 guests, including Bureau de Change (BDC) operators, bank chief executives, and captains of industry, were waiting eagerly for him to address them on the FOREX market and the fate of the naira.
When Central Bank of Nigeria (CBN) Governor Godwin Emefiele finally began to speak, it dawned on all present that Nigeria was heading for a major crisis, and that unless something urgent was done to stop FOREX speculators, the economy is doomed.
Emefiele told the audience that the coming weeks would be tough for FOREX speculators and importers, who misuse dollar allocations from the apex bank to import commodities that could be produced locally. He said the urgent nature of the meeting implied that activities of speculators and importers were hurting the naira, foreign exchange reserves and the economy and must be halted at all cost.
So, many saw it coming when last weekend, the CBN scrapped the Retail Dutch Auction System (RDAS) and replaced it with the Interbank Foreign Exchange (IFEX) market because of “undesirable practices” by those it called economic agents.
By scrapping the RDAS, a key part of its currency-management system, the CBN has effectively devalued the naira for the second time in three months.
Before now, Emefiele had threatened to withdraw the FOREX dealing licences of banks that engage in speculative demand for the dollar at the market. He said the speculative activities had led to artificial demand for the dollar and an unnecessary pressure on the naira.
“We will not hesitate to suspend the dealing licences of banks speculating on the dollar. Companies caught involved in sharp practices under the guise of seeking dollars to import items into the country will lose their licences,” he said.
Emefiele, who described currency speculation as sharp practice, said the CBN would not shy away from dealing with the unpatriotic behaviour which could make the nation “plunder its external reserves and throw the country into crisis”.
The CBN chief said frontloading demand for FOREX and other speculative practices made the apex bank to come up with certain measures aimed at stabilising the markets.
The CBN Director in charge of Corporate Communications Department, Ibrahim Mu’azu, said that with the scrapping the RDAS, all demands for FOREX should be channelled to the IFEX market.
He noted: “With the sharp decline in global oil prices and the resultant fall in the country’s FOREX earnings, the bank has observed a widening margin between the rates in the interbank and the RDAS window, thus engendering undesirable practices including round-tripping, speculative demand, rent-seeking, spurious demand, and inefficient use of scarce foreign exchange resources by economic agents.”
This, he said, “has continued to put pressure on the nation’s foreign exchange reserves with no visible economic benefits to the productive sector of the economy and the general public” as a result it had to wield this big stick to protect the naira.
Mu’azu added: “It has become imperative that appropriate actions be taken to avert the emergence of a multiple exchange rate regime and preserve the country’s foreign exchange reserves.”
He said the managed float exchange rate regime, which the CBN had adopted following the liberalisation of the foreign exchange market, has for the most part been successful in ensuring exchange rate stability in line with its mandate, but giving the infractions commuted by the so-called economic agents the CBN he said, had no choice but to take this decision.
Stakeholders speak
When the news hit the market, it triggered diverse reactions.
President, Association of Bureau De Change Operators of Nigeria (ABCON), Alhaji Aminu Gbadabe, said the policy was ill-timed. He told The Nation that the policy would push interbank rate to N250 to dollar and increase the panic in the sector.
“It is not the right time to cancel RDAS now; there is panicking in the FOREX market,” he said.
Gbadabe said the policy will aggravate challenges faced by importers. He said that the CBN should have punished banks that violate the RDAS rules, instead of scrapping it.
“I expected the CBN to conduct a forensic examination of the of FOREX trading and punish erring banks. There were cases where banks used fake documents or no documents at all to demand for FOREX at RDAS,” he said.
But the former President, Chartered Institute of Bankers of Nigeria (CIBN), Mazi Okechukwu Unegbu, described the policy shift as mixed blessings. He said the problem started when Emefiele came in and made statements that triggered a rush for the dollar.
“Many people started changing their naira to dollar and that created dollar scarcity. It was made worse when oil price started coming down and banks not disciplined enough, have also been accessing FOREX without proper documentation,” he said.
To him, the economy is very weak because of the drop in oil price.
Foreign investors only come in and make huge returns without investing in the economy, he said, adding that the policy shift will equally increase market speculation.
Unegbu advised the government to solidify the economic base by diversifying the economy and covering the leakages that encourage corruption.
He predicted a rise in unemployment, saying that he was already thinking of how to downsize as an employer of labour to enable him cope with the expected rise in cost of production.
The Managing Director, Bluewall Bureau De Change, Lucky Aiyedatiwa,, said the policy has made it easy for the interbank to be the centre of attraction and allowed the naira to defend itself. He said the RDAS created room for abuse, and that the policy will check round tripping.
“Let the naira defend itself. The CBN can on its own sell to the banks once. The CBN has also brought everyone on the same page by unifying the market. I think we have finally gotten it right,” he said.
The President, Lagos Chamber of Commerce and Industry (LCCI), Remi Bello, said the CBN’s action was inevitable since the country had been running on a mono economy. He said the level of gap that existed between the RDAS and interbank was too high and created room for speculation and volatility.
He said the gap that created will only be felt now, but later, it will benefit the economy. He predicted that inflation will go up and that locally-made products will now be cheaper overseas.
Bello, however, cautioned that Nigerians with penchant for foreign goods should have a rethink.
The Managing Director of Financial Derivatives Company Limited, Mr Bismack Rewane, said the RDAS structure meant buyers get FOREX in official market at N168 per dollar and sell at the parallel market at N215 to the dollar, leaving a profit margin of N47 on every dollar for doing nothing. He said the CBN has now converged the market and rates into interbank and parallel markets which leads to pure competition and reduced arbitrage opportunity.
He said that the IFEX will make aggregate demand for FOREX to fall, aggregate supply will increase, while price system will be efficient.
To Rewane, there can never be a good time to adjust a currency to its fair value but it will always be better late than never. Only 10 to 15 per cent of transactions are covered by the subsidised RDAS rate, according to him.
He said: “After a period of heightened uncertainty, the CBN restored some calm in the markets by scrapping the RDAS forex segment. Nigeria now leaves the club of 34 countries in the world operating multiple exchange rates. Most countries have gone through this phase in the journey towards full currency convertibility.”
Rewane said the new system has one big advantage because it discontinues the practice of all the banks mobilising their naira and queuing up to purchase dollars.
The interbank system, he said, is not only more efficient but it allows interest rates to find their levels naturally.
“The cost of imported raw materials will increase; part of which will be passed on consumers. Besides, devaluation is not inflation as it will lead to compressed profit margins for companies; about 15 per cent decline in corporate earnings is expected,” Bismack said.
The Head, Markets at the FBN Capital, Olubunmi Ashaolu, described the scrapping of the RDAS as a ‘bold but necessary step by the CBN’, even as he admitted that the slide in oil prices effectively forced the hand of the CBN.
His words: “Official reserves at the beginning of this week stood at $32.7 billion, 18 per cent below end-February 2014 levels. In December, the CBN spent $2.3 billion defending the naira. Despite the occasional interventions, the pressure on the naira intensified, forcing the CBN to shift demands out of RDAS to the interbank market. While this brought some relief to the RDAS, the interbank rate diverged sharply from the official rate. The writing was on the wall for the de-facto devaluation.”
He said the CBN has effectively shifted all RDAS demand to the interbank market, thus minimising its role as the ‘prime’ market maker.
“The move”, he said, “is a necessary one to ensure the stabilisation of the naira and reflect the demand and supply dynamics. This will improve market depth and efficiency. It effectively closes the arbitrage opportunity for “round-tripping, speculative demands, rent-seeking and spurious demands,” he said.
Ashaolu said the naira will get more support with a slight recovery in oil prices to $60/barrel.
According to him, the CBN decision will bring a positive impact on the raw materials being imported by companies dealing in consumer goods.
Head, Macro Research Africa at Standard Chartered Bank, Mrs. Razia Khan described the policy as positive news that will create more transparency in the market.
She, however, suggested the close monitoring of the CBN’s support of the interbank FOREX with the current oil prices and the difficulty in replenishing the foreign exchange reserves.
Her words: “With Nigeria’s foreign exchange reserves under pressure as a result of sliding oil prices, markets had anticipated eventual unification of different exchange rates. Following the announcement in February that presidential and parliamentary elections would be postponed to 28 March, Nigerian markets were subject to greater volatility.”
Mrs. Khan said that with foreign reserves under pressure and amid growing concern that a wide RDAS-interbank spread will encourage ‘round-tripping’, the CBN will now stop RDAS auctions; effectively discontinuing its foreign exchange subsidy for certain categories of demand.
Naira woes
For two consecutive days last week, FOREX market operators pulled the plug on electronic trading in the naira, after it slid past N200 to the dollar on fears that the postponement of the elections could trigger a constitutional row.
For the first time, frontline bankers in Lagos agreed to deploy a ‘circuit-breaker’ and halt trade after the naira dropped more than two per cent. At its weakest, it was quoted at a record low of N204.25 to the dollar, a decline of 20 per cent since November last year. The rout has been driven by the combination of tumbling oil prices and a rise in political risk.
While these lasted, the CBN stopped banks from reselling dollars bought at the RDAS to other lenders, or use them for purposes they were not meant. The move was aimed at curbing currency speculation and strengthening of the naira against the greenback.
The naira on Friday closed at N197 to the dollar at the IFEX but exchanged at N210 at the parallel market. It has lost five per cent over the past 10 days – the most on a weekly basis since December 2008.
The 2008 global financial meltdown contributed to the naira’s freefall.
According to Rewane, Nigeria was not prepared 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.
Previous measures and BDC’s regulation
The CBN has for long, been making changes in the BDC sub-sector. On June 23, last year, it raised the minimum capital requirement of BDCs to N35 million from N10 million. It also raised the mandatory caution deposit to N35 million from $10,000.
It recently gave approval to additional 102 BDC operators, bringing the total to 2,544 since the recapitalisation deadline lapsed in July, last year.
The CBN has also directed that all importations including electronics, finished products, information technology, generators, telecommunication equipment and invisible transactions must henceforth be funded from the interbank FOREX market only. The policy was introduced to maintain the existing stability in the market and strengthen the various measures already initiated by the regulator.
Failed promises?
The misfortune of the naira began in November 2008, when it first crashed to N120 to the dollar from N118.
By the middle of that month, it fell to about N134 to the dollar and the free-fall continued in the following year.
Before the close of the first week of January 2009, the naira had fallen to about N144 to the dollar at the IFEX market.
The situation became even worse at the parallel market as the currency exchanged for N147 to the dollar. It later fell to N160 to the dollar, causing greater shocks for international business transactions.
Against all odds, former CBN Governor Prof. Charles Soludo said he was taking full charge to bring stability to the economy and restore the glory of the naira.
“I can tell you that those who have bought up dollars and are stock-pilling them in anticipation for profit will regret because it will soon bounce back,” Soludo had said.
His successor, Mallam Sanusi Lamido Sanusi believed strongly on exchange rate stability.
Under his wtach, the apex bank consistently pursued a policy aimed at achieving exchange rate stability, banking sector stability and single-digit inflation target.
Sanusi’s successor, Emefiele has also promised to sustain his predecessor’s legacy.
The apex bank chief said in his inmaiden speech in June 2014: “In view of the high import-dependent nature of the economy and significant exchange rate pass-through, a systematic depreciation of the naira will literarily translate to considerable inflationary pressure with attendant effect on macroeconomic stability.
“Therefore, under my leadership, the CBN will continue to focus on maintaining exchange rate stability and preserve the value of the domestic currency.”
Despite these promises, the fate of the naira has clearly shown that successive CBN regimes have all failed to protect the local currency from value erosion.
The development has grave consequences for the economy.
