Last week’s meeting with bank chief executives and their treasurers to preserve the naira and the foreign exchange reserves shows how determined the Central Bank of Nigeria (CBN) is to achieve exchange rate stability. Although the apex bank acted to save the naira and foreign reserves against falling oil prices, many doubt that this measure will do the magic in an import-dependent economy like Nigeria’s, writes COLLINS NWEZE.
It was long expected, but when it finally came, it was below expectations. Alhaji Aminu Gwadabe, President, Association of Bureau De Change of Nigeria (ABCON), said of last week’s closed door meeting between the Central Bank of Nigeria (CBN), bank chief executive officers and their treasurers.
The meeting focused on issues surrounding CBN’s policy on the foreign exchange market, the conditions of the naira and foreign exchange reserves and the need to review the tight control on the forex market.
It also discussed JPMorgan’s threat to eject Nigeria from its Government Bond Index (GBI-EM) by the year-end unless it restores liquidity to currency markets in a way that allows foreign investors tracking the benchmark to transact business with minimal hurdles.
The CBN had imposed tight controls on the foreign exchange market in February to curb speculation on the naira and save the dwindling foreign reserves, which closed 2013 at $43.6 billion, about $500 million below the $44.1 billion recorded on December 28, 2012. The reserves have dropped to $29 billion. The CBN set its exchange rate peg at N198 to the dollar in February but has changed it to N196.90 against the dollar last week, with dealer, saying the tweaking was not a reflection of the market.
Before setting the restrictions meant to protect the reserves, the apex bank had been battling to prop up the naira after a sharp fall in the price of oil, which triggered a sell-off in assets by foreign investors. The CBN has also fixed the rate at which banks can buy dollars from oil companies.
But Bureau De Change (BDC) operators said the meeting would achieve nothing positive because its members and other critical stakeholders in the forex market were shut out of the discussions.
Gwadabe told The Nation the CBN shut out critical stakeholders from the meeting, hence, it will be difficult for the outcome of the meeting to impact on the forex market fundamentals.
He said the exclusion of the nearly 3,000 BDCs and manufacturers made them feel shortchanged on a policy that will directly impact on their businesses and economy.
He said the CBN felt that only 22 commercial banks were needed to fix the mess in the forex market and falling foreign reserves, but it actually needs the collaboration of stakeholders.
“They CBN always see us as small players. But remembers we have nearly 3,000 BDCs, meeting the import demands of over 170 million people. Today, almost every Nigerian is an importer and we are the ones meeting their forex demands.
“I don’t see any sense in making a discussion that will affect the lives of over 170 million private. We feel short-changed. The CBN needs to know that the discussions should be a two-way process. Even manufacturers should not be left out,” he said.
CBN Spokesman Ibrahim Mu’azu said the outcome of the meeting would be published this week, but he refused to comment on BDCs’ exclusion.
Analysts said the battle to restore exchange rate stability had been long. Although the naira closed at N197 to the dollar at the interbank last week, it still exchanges at N210 at the parallel market and has remained in that threshold for nearly six weeks.
At its weakest, the naira sold at a record high of N235.60 to the dollar, a decline of 30 per cent since November. The naira also dropped to N220 at the parallel market before the apex bank closed the Retail Dutch Auction System (RDAS) in February.
Gwadabe said though some of the steps taken by the CBN have helped the market remove illegitimate transactions, he urged the regulator to continue to carry stakeholders along.
Also, Sub-Saharan Africa Economist at Renaissance Capital and co-author of the Fastest Billion Yvonne Mhango, said the CBN has shown 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.
Head, Equities Market at FBN Capital, Olubunmi Ashaolu, said the CBN has, by the policy, an objective on its monetary policy. 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 that such action would make Nigeria’s investment climate more attractive to foreign investors.
CBN’s moves
Some of the steps taken by the CBN to fix the naira and reserves include fixing the rate at which banks can buy dollars from International Oil Companies (IOCs) at not more than N2 spread to its clearing rate, dealers said. The policy is the bank’s latest attempt to prop up the naira hit by the drop in oil prices. The CBN has pledged to stabilise the naira and has been deploying various measures. Dealers said the apex bank did not issue a formal circular on the directive, but instead resorted to persuasion, adding that the total outstanding dollar demand of about $600 million was not met.
Oil companies usually sell dollars through auction to lenders to buy naira to fund their local operations. The CBN has also scrapped its bi-weekly currency auctions and a market body said it would sell dollars only at N197, a move that amounts to a de facto devaluation of the currency.
This policy is part of what the CBN Governor, Godwin Emefiele, promised to stabilise the currency. 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 (US) Federal Reserve.
At the height of the programme, the Federal Reserve was supplying a total of about $85 billion into the U.S. economy monthly, through asset purchases. This programme came to an end last October, thereby significantly reducing the supply of US 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.
Previous steps taken by 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 authorised dealers, CBN Director, Trade & Exchange Department, O. I. Gbadamosi, told stakeholders that the policy was to maintain the 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
Last June 23, the CBN, among others, 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 the 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.
Naira crises complex
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 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.
