Has the Central Bank of Nigeria (CBN) lost the battle for exchange rate stability? This is the question many are asking as the naira continues to fall, despite the CBN’s efforts to stabilise it. Although it closed at N197.8 to the dollar at the interbank last week, it still exchanges at N220 at the parallel market, making nonsense of the benefits of the CBN interventions, writes COLLINS NWEZE.
Ahead of this month’s elections, increased political risk, falling oil prices and lack of interest in investors’ frontier assets have put the naira under pressure.
At its weakest, the naira was quoted at a record low of N206.60 to the dollar last month, a decline of 20 per cent since November. The naira also dropped to N220 at the parallel market before the CBN closed the Retail Dutch Auction System (RDAS) last month.
This has depleted foreign reserves and shot inflation up to 8.2 per cent in January. The foreign exchange reserves fell 9.04 per cent to $30.87 billion by March 4, from $33.94 billion a month earlier. The CBN has used the reserves to support the ailing naira, which has been hammered by falling global oil prices and uncertainty over the delayed presidential elections due later this month.
Although the currency was able to stabilise at N197.8 to dollar at the interbank last week, many insist that it has indeed fallen from the Olympic heights. The interbank market is the top-level foreign exchange market where banks exchange different currencies. The banks can either deal with one another directly, or through electronic brokering platforms.
Although it was unclear what stabilised the naira, interventions from International Oil Companies (IOCs) cannot be ruled out.
But the local currency suffered its biggest monthly fall in over five years last month, dealers said, citing concerns over political uncertainty and the CBN’s ability to manage a currency hammered by weak oil prices.
The naira shed 8.3 per cent to the dollar in February, which dealers said was worse than the 6.9 per cent fall in November after the CBN devalued the currency by eight per cent to save the foreign reserves.
New measures
Last week, CBN fixed 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 naira crashed through the psychologically important level of N200 to the dollar last month in a rout triggered by weak oil prices and escalating tension over the postponement of a presidential election.
The CBN has pledged to stabilise the naira and has been deploying various measures. Dealers said the central 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 an auction to lenders to buy naira to fund their local operations. The naira closed at N197 to the dollar on Thursday, firmer than N199.9 its ended on Wednesday. Dealers said the bank had beefed up inspection of commercial bank’s trading books to verify utilisation of its dollar sales.
The CBN scrapped its bi-weekly currency auctions last month and a market body said it would sell dollars only at 198 naira, a move that amounts to a de facto devaluation of the currency of Africa’s biggest economy.
This policy, is part of 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 (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.
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 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
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 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.
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 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.
