The last one year has been a tough one for the naira which started the year on a shaky ground. But several policy initiations by the Central Bank of Nigeria (CBN) have curbed foreign exchange (forex) volatility and put the local currency back on recovery path. The coming of Investors’ and Exporters’ (I&E) Forex window and the continued dollar interventions by the CBN have ensured that forex demands at the retail end of the market are settled.
NANCY OKON, a civil servant based in Lagos, planned her annual vacation in the United States. Sadly, her holidays were cancelled after it dawned on her that getting the needed dollar for the event would be difficult and expensive. That was in January when the naira exchanged at N485 to the dollar and getting it was even more tasking because of acute shortage of the greenback.
By February, the exchange rate had climbed to all time high of N520 to the dollar at the parallel market and many parents abandoned their children in foreign schools because of the difficulty in accessing foreign exchange (forex) from the market.
Those experiences persisted till April when the Central Bank of Nigeria (CBN) introduced the Investors’ and Exporters’ (I&E) Foreign Exchange window that allowed foreigners and investors to pump in dollars into the economy at a rate of their choice. The pricing for dollar was then determined by market forces.
The speculators lost over N700 million in March, as the CBN sustained its dollar interventions in the interbank market. The losses grew to over N1 billion in April, after the I&E Forex Window was opened to deepen dollar liquidity in the economy.
The economy has also enjoyed major inflow of forex in recent months with over $11.3 billion recorded in the I&E FX Window. The I&E Forex window, also called willing-buyer willing-seller window, allows foreign investors to find buyers for their dollars at a mutually agreed price. The CBN controls about 15 per cent of all the transactions carried out in the window.
The coming of I&E Forex window was followed by continuous interventions by the CBN which enabled banks and bureau de change (BDC) operators to meet forex demands at the retail end of the market. The naira now exchanges at N360 to dollar at both the BDC and parallel market rates while the official rate for the local currency stood at N306 to dollar.
Aside establishing the I&E Forex window, the CBN also opened a special forex window for Small and Medium Enterprises (SMEs). The window, which allocates $20,000 per business per quarter, helps the SMEs import “eligible finished and semi-finished items” needed for their businesses. The CBN said the bank’s special intervention was necessitated by its findings that many SMEs were being crowded out of the forex space by large firms.
The CBN Governor, Godwin Emefiele, had earlier called for a change of lifestyles among Nigerians to sustain naira’s recovery against the dollar. He said in a 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 the consumption pattern from foreign to indigenous goods would impact positively on the value of the local currency. Analysts said the CBN’s assurance to stakeholders that it will continue to intervene in the forex market, a promise it has kept for more than seven months, stabilised the market. But stability is bad news for forex speculators. They prefer volatility which makes them to declare more profits.
The 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. “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,” he said.
He said Nigeria’s currency crisis was triggered by the dip in crude oil prices, which adversely affected Nigeria’s foreign reserves and created chronic dollar shortages. It was the need to curb these dollar shortages and stabilise naira against world currencies that prompted the CBN to regularly inject dollars into the market to narrow the spread between the official and black market rates. This measure has not only led to the convergence between parallel and black market rates, but has chased currency speculators out of the market.
Black market operators persevere
While the banks have continued to get dollar supplies to meet the demand of genuine forex users, the black market operators whose cost of operation has remained the lowest in the value chain, have also stayed put in the business.
“The black market operators do not need licence to operate, neither do they demand for documentation from forex buyers. They are simply doing cash and carry business and have largely benefited from the rate convergence although their profit margin has also dropped,” a Lagos-based BDC operator, Isah Yakubu, said.
He said black market forex has been in operation for over 100 years, adding that patronage for this market has continued at all times, not-withstanding the state of the economy and forex market.
For the currency speculators, who buy dollar for keep, and sell when it strengthens, the forex business has been a nightmare after the CBN sustained its interventions. After recording huge losses in naira and foreign currencies, these speculators seem to have been chased out of the country’s forex market.
Confirming the development, the President, Association of Bureaux De Change Operators of Nigeria (ABCON), Aminu Gwadabe, said with the rate convergence at both the BDC and parallel markets, and transaction margins narrowed to N2 in most cases, the market seems unattractive to speculative dealers.
Afrinvest West Africa Limited Managing Director, Ike Chioke, said the jump in foreign inflows was not a surprise given the development in the forex market, particularly the launch of the I&E forex window in April.
“The largest volume of foreign inflows was recorded in May, underlining the positive impact of forex market transparency and flexibility on investor confidence. The knock-on effects of strong portfolio flows are already evident in the performance of the domestic equities market which has historically been driven by foreign portfolio investors,” he said. Chioke said a strong positive correlation exists between the exchange rate and crude oil price in the country.
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 the dwindling fortune of the naira. “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.
Forex restriction on 41 items
The CBN’s restriction of 41 items from accessing forex from official windows was one of such policies. More than two years after the policy shift, its objectives such as encouraging local production of the affected items and boosting local industries suffocated by the importation of competing products are being realised.
The policy implementation was part of the home-grown solutions introduced by Emefiele to sustain forex market stability and ensure the efficient utilisation of available forex to grow critical segments of the economy.
The policy implies that those who import these items can no longer buy foreign currency from the official window to pay overseas’ suppliers. Rather, they will have to source forex from the parallel market or BDCs to pay for their imports.
The CBN boss said the bank has been developing home-grown policies to surmount challenges that confronted the economy in recent times.
For instance, over the last 10 years, the CBN had invested over N2 trillion in funding agriculture, Small and Medium Enterprises (SMEs) and other manufacturers in the value-chain.
The regulator said the apex bank would continue to support operators in the agriculture, SMEs and manufacturing enterprises through its development finance initiatives, with a view to complementing the Federal Government’s efforts at diversifying the economy and ensuring that the nation is self-sufficient in food production.
Speaking on the 41 items, Emefiele said: “The issue of those 41 items, unfortunately, is one that has been on my table. But I think it is important that in the life of an economy, there is a need for us to take a look and ask ourselves: what really are we importing into this country? When this thing started, we said: Why should we import rice? Why should we import toothpick? Why should we import palm oil? At a point in this country, Nigeria was the largest producer and exporter of palm oil and we were controlling 40 per cent of the market share.
“So, there is the need for us to say at this time when there is a scarcity of forex, it should be set aside for the import of items we cannot produce in this country.”
The CBN boss’ logic is that when items such as palm oil, are imported, the local producers are made poorer. “When we import rice, we impoverish the rice producers in Abakaliki, Kebbi, Sokoto, Katsina and other parts of the country. We need to look at that very seriously because God has blessed this country with good climate, good weather, which should be taken advantage of. Since we can produce these things, let’s use them to feed our people so that we can save foreign exchange for the country,” he said
Emefiele said he was satisfied with the outcome of the policy, adding that more time was needed to evaluate its success. The CBN governor said the policy could be reviewed when it was concluded that local manufacturers of the restricted items had become very competitive. Emefiele clarified further: “My view would be that if you have forex, you should devote it for the import of items that are important and can’t be produced in the country. If you have excess forex, save it or create reserves. My view, which is the view of government, is that there are certain items that we can produce locally.
“But by importing some of these items, you impoverish the people. How can we create jobs for our people by living like that! Donald Trump is the president of the largest economy in the world. When he was campaigning, he said everything must be about America and he takes the interest of Americans first into consideration and by doing that, you create wealth for your people.
“I got engaged with some of these people where Nigeria imports from and I said to them: You want us to import fish from you, please tell me, what can you import from Nigeria? And he said nothing. I feel that is not a good answer from a colleague in the financial sector. So, that is the reason why you have to be smart to tell yourself that I can produce it and because I can produce it, I have to produce it and use it to feed my people and save the country foreign exchange.”
The CBN boss disclosed that government policy on support for local production was gaining ground and attracting the interest of multinational companies who were already investing in rice production.
“We have seen multinationals coming to say they want to join in palm oil production. For instance, go to Cross River State, PZ Wilmar has been cultivating 58,000 hectares of palm plantation; Presco, Okomu are all doing something. So, if a PZ Wilmar needs foreign exchange because there is a little gap, I will not mind giving them because I have seen the interest they have shown cultivating more land.
“We have seen people like Coscharis who hitherto had been in automobile imports, has acquired thousands of hectares of land in Anambra trying to grow rice. We were there last year and this year we would be there again to see what they have done.”
The CBN said as part of its mandate, it would continue to act as financial catalyst in targeted sectors of the economy with humongous potential for creating jobs, reducing the country’s import bills in a very significant manner. It said monetary policy alone cannot fully achieve the objective of macro-economic development through real sector financing.
Future of the naira
The misfortune of the naira began early November 2008, when it first crashed from N118 to N120 to the dollar. By the middle of that month, it fell to about N134 to the dollar. The free fall continued in early 2009. By the end of the first week of January 2009, the naira had fallen to about N144 to the dollar and the inter-bank forex market.
The situation worsened 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 trade. The local currency had weakened to N215 to the dollar in early January and continued to depreciate till date.
The Federal Government and foreign investors have disagreed on the future of the naira. Government officials are of the view that the local currency has stabilised against foreign currencies, but some foreign investors think otherwise.
Portfolio inflows have risen in the past three months with crude prices rising above $60 a barrel and money managers taking heart from a new foreign-exchange trading window in which the naira has converged with the black-market rate.
That development prompted Emefiele and the Debt Management Office (DMO) Director-General Patience Oniha, informing investors in London that the currency was set to strengthen. The Finance Minister Mrs. Kemi Adeosun, also joined the fray, saying the government saw no significant exchange rate risk.
However, financial analysts said Nigeria’s system of capital controls and multiple exchange rates would struggle to survive a drop in oil revenue, or sentiment turning against emerging markets, according to investors, including Ashmore Group Plc and Standard Life Aberdeen Plc.
“At the moment, it is easy for them to manage the current system and muddle through,” said Brett Rowley, Managing Director at TCW Group in Los Angeles, which oversees $200 billion, which recently started buying naira debt after pulling out during the 2014 oil crash.
“That could change if we got a significant drop in crude production or prices. It’s not clear how Nigerian officials would react. That would be a key test to reassure investors they can get their money out even in times of stress.”
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 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
