The Nation Newspaper

Tag: Naira

  • CBN sells $230m in forex forward as naira recovers

    CBN sells $230m in forex forward as naira recovers

    •Fed Govt eyes $500m Eurobond

    The Central Bank of Nigeria (CBN) yesterday auctioned $230 million in forward contracts on the official market. The dollar sale came after the regulator sold $370 million this week to boost dollar liquidity and help narrow the gap between the official and black market rates, traders said.

    The bank also sold $1.5 million on the spot market to help keep interbank rates at 305.50 per dollar. On the black market the naira firmed to N490 after opening at 505, traders said.

    Meanwhile, Nigeria may tap the international bond market for a second time this quarter as the nation seeks to stimulate an economy facing its worst downturn in 25 years.

    Vice President Yemi Osinbajo asked lawmakers this week to approve the sale of a $500 million Eurobond as part of the nation’s 2016 budget, according to a letter to parliament seen by Bloomberg.

    “We wish to take advantage of favorable market conditions to issue a Eurobond” by the end of March, Osinbajo said in a letter to lawmakers, seeking prompt approval for the plan.

    Africa’s most populous nation issued a Eurobond this month for the first time in almost four years, raising $1 billion in a deal that was about eight-times oversubscribed. The economy shrank 1.5 per cent in 2016 amid a slump in oil revenue and diminished foreign investment, according to International Monetary Fund estimates, the first full-year contraction since 1991.

  • Stop calling Nigeria ‘Naija’, NOA appeals

    Mr Garba Abari , Director-General, National Orientation Agency (NOA), has appealed to Nigerians to stop referring to Nigeria as `Najia’ to keep its originality.

    Abari told the News Agency of Nigeria (NAN) in Abuja on Tuesday that the new trend of making funky the original name of Nigeria was worrisome and not in the best interest of the country.

    “We try in all our advocacy visits to insist that Nigeria must be referred to as Nigeria and not Naija.

    “So, our schools have a role to play in this; the media itself has also got a very fundamental role to play because it is the media that helps in the propagation of this kind of misnomer.

    “All of us, as individuals, as corporate organisations, as media, whether broadcast, print or online, must wake up to the reality.

    “That the more we use these misnomers referring to our country, the fallout of it is that, a significant percentage of our younger ones will not even remember that Nigeria is the original name of our country.

    “I want to appeal to all Nigerians, young and old to always refer to our country as Nigeria.”

    Abari also urged parents to key into the efforts to preserve the country’s original name by discouraging their children and wards from referring to Nigeria as `Naija’.

  • Naira: Chasing the wind

    Naira: Chasing the wind

    Eight months into Godwin Emefiele’s ‘’Managed Float Exchange Rate System” – the verdict, at least so it appears, is that all is far from being well. If anything, things have gone much worse, not better, with the forex policy introduced in June last year.

    As predicted (or prophesied?), the naira has finally crossed the N500 line to the United States dollar; indeed, in the last two weeks, it has oscillated between N506 to N516. And so, the debate on whether the system can claim to have served the country well in the last eight months has ceased to be academic: it is the reality we now live with.

    Little wonder, the governors at the National Economic Council, (NEC) on Thursday last week demanded an immediate review of the policy by the Central Bank of Nigeria (CBN). What they had in mind, they wouldn’t say. Be that as it may, the surprise is that it took them eight months to come to that conclusion.

    Talk about the CBN being on the spot, weeks before, the cyber-sphere had been awash with all manners of theories – ranging from the outlandish to the harebrained –alleging serious economic crimes against the monetary authorities. Part of the frenzy of finding who to blame for the naira’s one-way trip to the Golgotha was to cast the Central Bank of Nigeria governor, Godwin Emefiele, in the lead of Project Kill the Naira! And as if determined to pour fuel into the raging inferno, Attorney General of the Federation and Minister of Justice, Abubakar Malami (SAN), reportedly issued the apex bank governor a query ostensibly to explain the charges – which I consider too base to list here – charges that may well have been dredged up from the vacuous rumour mill!

    Of course, these are interesting times. Soon enough, there would be enough blames to go round for everyone.

    For now, where do we go from here? From managed to the floating exchange rate regime, what next? We have turned full cycle. The former, despised for its rigidity – never mind that we had some semblance of stability – was blamed for sundry ills plaguing the economy. The latter, for all its pretences to the allocative power of the market has been a disaster (if it worked, we probably would not be talking of landing in the cesspit of recession).

    Trust the manufacturer who could not access forex; the parent who could not remit wards’ fees to the college in a foreign university, the sundry importer whose 41-odd items were declared ineligible for official forex by Emefiele’s CBN, there is no telling the difference between the old and the new. Not even a good word from our hordes of analysts for whom the thriving black market is sufficient proof of the blind alley that the two policies have left us! Eight months on, we may have just realised how badly the Nigerian ailment has been misdiagnosed.

    Here is what I wrote eight months ago when I first observed our obsession with forex management. The quest, I had reasoned, “stems from a fundamental misdiagnosis of the problem”. The problem, I had argued, being “more fundamental, touches on the ability of the economy to renew itself… the problem comes down to the tragedy of a nation that relies on a single commodity for all its forex; one that spends a disproportionate chunk of its forex on imports”.

    Needless to state that I have been proven right. Few weeks later I had also warned on this page: “Had the economy’s minders spent as much time on how to get the economy on its feet as they have done on figuring out the arithmetic of sharing the shrinking piggy bank, we would probably be well on the way to developing the concrete policies to get some our critical industries revving back to life and to boost our forex stock”.

    Today, we seem set for the same old prescriptions that brought us here in the first place. Never mind that the CBN has shouted itself hoarse; it appears that nobody is listening. The problem, says the apex bank, is that it does not have enough forex to go round! Unfortunately, unlike the naira which it has the liberty to print, the dollar is a no-go area.

    Yet, we expect the naira to rebound by throwing it to the market hounds. And while we can do nothing about increasing the stock of forex in the piggy bank, we are also not prepared to give up our love for those exotic items that consume a huge chunk of our forex! And while Emefiele fails to play the magician, we demand that his head be served on the platter!

    Just imagine the club of whiners. As it was in the very beginning, so it is even now: manufacturers, traders, contractors, portfolio investors to shady operators; name them; all them permanently on queue for forex. The range of demands is such that makes it tempting to assume that dollar has suddenly become the local medium of exchange. How could anyone not have foreseen the current unidirectional move of the naira more so at a time the supply of forex had severely contracted?

    Merely by the amount of pressure brought to bear on Emefiele’s CBN in the last few days, expect to see some hastily packaged policies to ameliorate what is essentially a structural problem – something that requires deep thought as against superficial obsession with forex management.

    But then, that is the way of a people that would rather treat symptoms than tackle the disease.

    Finally, I need to highlight another fundamental problem that the minders of the economy continue to ignore. Today, Nigerians worry that segment of that so-called parallel market has grown wings to the extent that it now plays the reference rate while the official inter-bank rate acts the adjunct. The question is: what are the monetary authorities doing about it? We are talking here of the club of unscrupulous actors known not only to prey on the system but have since become an atavistic force. What would it require to take them on? Why does the federal government prefer to feign helplessness in the face of their brutal assault on the nation’s currency? And where in the world, save Nigeria, are foreign currencies hawked on the highways as you would ‘pure water’?

    What is the role of the Bureau de Change in the equation? By rule, they are supposed to serve the lower end of the market. Do they? Given that the latter operate strictly by its own opaque codes, what is the chance in a million that the CBN will ever be able to bring this segment within the loop of its forex management?

    Is anyone still talking about respite for the naira?

  • Naira may plunge further, says don

    Naira may plunge further, says don

    THE Dean, Faculty of Business Administration, University of Uyo, Akwa Ibom State, Leo Ukpong, has warned of a further plunging of the naira against other international currencies, especially the United States (USD) dollar.
    Ukpong, a Professor of Financial Economics, said given the relatively low crude oil prices, excess demand for imports, dwindling foreign reserves, inability to manufacture most of the country’s daily needed products, and the outstanding unfunded foreign exchange future contracts on the Central Bank of Nigeria (CBN) books, the naira would fall to N620 by middle of the year.
    “This forecast assumes that the economy is prudently managed; otherwise, it could rise significantly above that rate,” he warned.
    He said many people had little confidence in the CBN’s exchange rate given its deviation from reality. The “black market” naira/dollar exchange rate, he said, remains the “real exchange rate” because that is what majority of businesses, consumers, and other active economic agents use to conduct their business activities.
    He explained that while multiple exchange rates were designed to assist vulnerable and strategic sectors of the economy, which depend on foreign inputs to grow and survive foreign competition, he, however, cautioned that such policy is not economically efficient and could lead to serious abuse and distortions within the domestic economy, as is the case in the country today.
    “Although I can’t tell you precisely by how much such policy has negatively affected the economy, I can say with a great amount of certainty that it has been significant as part of the factors responsible for the excessive depreciated value of naira and high inflation we face today in our country,” Ukpong said.
    He said the CBN should be blamed for this anomaly because officially the institution is responsible for foreign exchange policy. However, he said the economic team, the Presidency, and the legislature should also share in the forex blame. This is because they all have major roles to play in designing, influencing, and ensuring how the country’s foreign exchange policy is executed.
    “They are complacent partners with the CBN in this corruption driven foreign exchange policy regime. So, to harmonise and steady the naira, it is important that we get rid of all the multiple exchange rates; stop the foreign exchange sales to banks; and maintain one single market driven exchange rate, such as the interbank exchange rate,” Ukpong advised.

  • ‘Rate of naira counterfeiting less than one per cent’

    ‘Rate of naira counterfeiting less than one per cent’

    The rate of naira counterfeiting is less than one per cent, the Central Bank of Nigeria (CBN), has said.

    In a reaction to a widely publicised report alluding to wide range naira counterfeiting of about 20 per cent, the Acting Director, Corporate Communication of the regulator, Isaac Okorafor, said nothing can be further from the truth, saying those parading that line of information were grossly uninformed.

    In a statement yesterday, Okorafor said: “While we acknowledge that no currency in the world is immune from counterfeiting, we make bold to state that the rate of counterfeiting in Nigeria has been very minimal due to appropriate policies put in place by the Bank. Indeed our records at the Bank clearly indicate that the prevalence of counterfeit notes in Nigeria from January to December 2016 was less than one per cent (0.0014%) or 14 counterfeit pieces out of one million bank notes.

    “In line with our core value of proactivity, we have always endeavored to use strong security features to make it difficult for dishonest persons to counterfeit the currency. In addition to that, we have carried out periodic massive nation-wide enlightenment of Nigerians on easy identification of fake banknotes and the reporting of such.”

    He said the apex bank found it rather curious that a “former high ranking official of the CBN would make such bogus and unauthentic claims apparently calculated to destroy confidence in our national currency and sabotage the collaborative efforts of the CBN and the Federal Government at ensuring enduring stability of the financial system,” adding, “the unfortunate implication of the fabricated claim of the said former official of the Bank, is that it gives the false impression that two bills out of every ten Naira pieces held by an individual is ‘fake.”

  • Time to redenominate the naira

    Naira was first introduced as official currency for Nigeria in 1973. Nigeria adopted a national currency in replacement of the one with colonial notation. Thus, naira and kobo replaced pound and shilling. Nigeria currencies were introduced in coin and notes. There were half kobo, one kobo, 10 kobo and 25 kobo. These were token coins with reasonable purchasing power. The currency notes were 50 kobo, one naira, five naira and 10 naira being the highest.

    As the economy grew due to oil boom, the 20 naira note was introduced in 1977. However, with the devaluation of naira in 1991, some denominations were withdrawn while 50 naira was also introduced. This was geared at increasing money supply and devaluation of currency to boost demand for local product as suggested by the Structural Adjustment Programme (SAP). However, as good as the programme was, due to little or no effort towards export promotion and import substitution, the policy failed.

    Much later, namely- 1999,2000, 2001 and 2005; 100 naira, 200 naira, 500 naira and 1000 naira were introduced respectively due to lower purchasing command of previous denominations, policy failure, inflation and low public confidence in lower currency. While several administrations have searched for soft-landing in CBN, much of the work had little impact due to poor fiscal complement from government end. It was either an era of fiscal rascality or misery. There was little attention to textiles, manufacturing and education.

    Today, all the token coins re-introduced under Prof. Chukwuma Charles Soludo has returned to antiquity in people’s offices, homes, wallets and currency museums of the central bank. Nigerians rejected them even though they are still legal tenders with no value today. In spite of money being backed by government legislation, acceptability remains a major attribute authorities must consider as in the case of ‘the coins and the enforcement by the CBN in 2007’.

    The former CBN governor, Sanusi Lamido Sanusi attempted to print 5000 naira in 2012 but was vehemently rejected by Nigerians. In fact, the plan was to convert lower denominations to coins. What is clear is that, perhaps, all the several CBN governors including the present mean well for Nigeria. The problem seems to come from lateness in taking decision and policy implementation.

    At the moment, the denominations we have in polymer notes- five naira, 10 naira, 20 naira and 50 naira; their cost of production is fast approaching their face values. In theory, the currency should be converted to coins. However, the purchasing power of most of them is next to zero. Therefore, converting them to coins will not solve much of our problems. Similarly, the paper money namely- 100 naira, 200 naira and 500 naira and 1000 naira, have lost over 75 percent of their purchasing power from their initial date of production. Inflation, poor currency management, overreliance on a single major export product – oil, disconnects between fiscal and monetary authorities, currency trafficking, monetized polity, abnormal taste for foreign products, inability to hold government accountable and a lot more are responsible for emaciating naira. I am not sure we are serious at solving these problems today.

    Can we say the naira is dead? What is not in doubt is that the original value of naira is now in negative. What we know is that the value of one naira in 1973 is more than one thousand naira today. $1 equalled 63 kobo in 1973. Today a dollar is N315 at interbank rate and N500 at street rate. Besides, what N1 could buy in 1973, N1000 cannot buy in 2017. Between 2007 and 2017, we can also notice that $1 was N115 today it is N315. More than 100 percent of its value is gone using 2007 as the base year. It will be worrisome to compare the price of a bag of cement, a litre of PMS, a litre of kerosene, a tin of milk, a bar soap, a cup of sugar, a bag of rice, a pair of shoe, a cup of garri and many more in year 2007 to what the price is today (10 years ago). A more stable economy would only have a little increase.

    What is the way forward? Diversify the economy; improve infrastructure, hope for positive externalities, a review in exchange rate policy and import substitution. All of these solutions are very important but the willingness as of now is what is begging for answer. Political solutions seem to hold sway for real economic issues. It should be noted that they are not short-term based solutions.

    Redenominating our currency is very important now before it is too late. While I agree this may not directly affect the GDP figures, it will help reduce some pressure on naira and in fact induce GDP growth. Now the question is, ‘What is redenomination of currency’?

    Currency redenomination is the process where a new unit of money replaces the old unit with a certain ratio. This can be achieved by removing zeros from a currency that is moving some decimal points to the left. The aim here is to correct perceived misalignment in the currency and pricing structure as well as enhancing the credibility of the local currency.

    My recommendation is, we need to drop two zeros from the currency or moving two decimal places to the left. The name of the national currency will still be the Naira or any other name as government may deem fit. However, to avoid confusion, when transacting, the existing Naira will be referred to as the “Old Naira”, and the new one to be called the “New Naira” or any other name.

    The benefits of this policy are enormous. They include better anchor inflation expectations, strengthening of public confidence in the Naira or any other name government may prefer, make for easier conversion to other major currencies, reverse tendency for currency substitution as we currently witness,  eliminate higher denomination notes with lower purchasing power, reduce the cost of production for a currency with little purchasing power, distribution and processing of currency, promote the usage of coins and thus a more efficient pricing and payments system, promote the availability of cleaner notes with stronger value, deepen the foreign exchange market, ensure more effective liquidity management and monetary policy, expose stolen money, convertibility of the naira and hence greater confidence in the national economy and lead to greater inflow of foreign investment, position the Naira to become the ‘Reference currency’ in Africa. CBN will better capture monetary operations for better policy formulation.

    Failure to consider this policy will result in continuous speculation on naira. The fear is, if we do not consciously terminate speculation on the naira now, by the end of 2017, a dollar may be exchanging for N800.

    There is nothing to fear about this policy as countries such as Germany, Hungary and more recently Ghana have implement it in their various countries.

     

    • Alaje is an economist.
  • Naira slides to N500/$ at parallel market

    Naira slides to N500/$ at parallel market

    The Naira on Friday depreciated further to N500 to a dollar at the parallel market after it had remained stable for nearly three weeks, the News Agency of Nigeria (NAN) reports.
    The Pound Sterling and the Euro traded at N616 and N530 respectively at the open market.
    The Nigerian currency, however, remained stable at the Bureau De Change (BDC) segment of the market exchanging at N399 to a dollar, while the Pound Sterling and the Euro closed at N617 and N527, respectively.
    The Naira also remained stable at the interbank window exchanging at N305.25 to a dollar.
    Traders at the market said that the scarcity of the greenback was far from being over.
    NAN reports that in spite of the weekly sale of forex to BDCs by the apex bank, the Naira could not resist the temptation to fall. (NAN)

  • ‘Nigeria may devalue naira this year’

    ‘Nigeria may devalue naira this year’

    Nigeria will devalue its currency, the naira, later this year in an effort to improve liquidity and close the gap between the official and exchange parallel markets, a Reuters poll has shown.

    That expectation by seven of the nine economists polled this week comes even though Central Bank of Nigeria (CBN) Governor Godwin Emefiele has said he would not devalue the naira.

    An analyst and investor at Rich Management in Nairobi. Aly-Khan Satchu, said: “The possibility of a devaluation is certain; the question is the timing. They are eventually going to capitulate at some point this year, a similar scenario to Egypt at the end of last year – a big devaluation in the official rate.

    “Nigeria stubbornly held on to an official peg of 197 naira to the dollar for 16 months, until June of last year, hurting the economy. It subsequently floated the currency but maintained some measures to prevent further weakening. The naira currently trades at 305 per dollar. Dollar shortages meant the currency fell to close to 500 against the dollar last week on the unapproved open retail market.”

    Satchu said keeping the currency artificially high is effectively stalling the economy and making investment difficult.

    The CBN is expected to leave its benchmark interest rate unchanged on Tuesday, and for the rest of the year, at 14 per cent to halt rising inflation and support growth, the wider poll of 12 economists also found. After the apex bank added 300 basis points to borrowing costs last year to try and tame soaring prices, all 11 analysts surveyed said they expected it to keep its benchmark rate on hold next week. Inflation was uncomfortably high at 18.55 per cent in December, its highest in more than 11 years and the 11th straight monthly rise.

    Galloping inflation comes as Africa’s largest economy grapples with its first recession in 25 years, largely caused by the decline in global oil prices since 2014. Crude oil sales account for 70 per cent of government revenue. Inflation is expected to average 15.2 per cent this year and slow to 11.0 per cent in 2018.

    Cobus de Hart of NKC African Economists in a client note, said:“High inflation, however, remains the main stumbling block at this stage, but the CBN may become more willing to gradually loosen its grip on the naira as inflationary pressures start to ease somewhat this year.”

    The economy is expected to grow 1.5 per cent this year and 2.9 per cent next, although the most bearish analyst said it is possible the economy will contract 1.5 per cent this year.

  • Fresh battle to save Naira begins

    Fresh battle to save Naira begins

    Despite the various steps taken by the Central Bank of Nigeria and licensed Bureaux  De Change (BDCs) to restore the naira’s glory, the local currency has been on the ropes for nearly two years. Last week, the Association of Bureaux De Change Operators of Nigeria (ABCON) inaugurated the Uniform Weekly Exchange Rate for Licensed Bureaux De Change Portal to implement and monitor unified rate across board. The ABCON portal, which comes  alive today, is expected to ensure fair pricing and stability for  the naira, herald exchange rate convergence and diminish the influence of currency speculators hurting the economy, reports COLLINS NWEZE.

    •BDC operators eradicate multiple exchange rates

    BUREAU de Change (BDC) operators have been looking up to this week with high hopes.  They will be receiving the first batch of dollar sales for the year from the Central Bank of Nigeria (CBN), with the cash expected to boost dollar liquidity and strengthen the naira against the greenback.

    Besides, the BDC operators, under the aegis of Association of Bureaux De Change Operators of Nigeria (ABCON), will today begin the implementation of the newly launched Uniform Weekly Exchange Rate for Licensed Bureaux De Change Portal.

    The portal is being launched to promote exchange rate convergence and achieve uniform exchange rate for the naira against the greenback across all licensed BDCs. It was created with the understanding that the Foreign Exchange (forex) market is driven by information flow. The positive information flow, it is believed, will translate to better pricing for the naira and improved investment sentiments among others.

    Having recognised these facts, the ABCON, the umbrella body for all CBN-licensed BDCs, last Tuesday, lunched the Uniform Weekly Exchange Rate for Licensed Bureaux De Change Portal.

    ABCON President Aminu Gwadabe, who launched the portal at a media forum in Lagos, said the technology will bring exchange rate convergence, eradicate currency speculation and ensure the naira’s speedy recovery against the dollar.

    According to him, such feats are in line with CBN Governor Godwin Emefiele’s plan to stabilise the naira and boost investors’ confidence in the local economy. The CBN chief told BDCs at a meeting that he was looking at ways to boost dollar liquidity and eliminate the spread at the parallel market.

    The apex bank’s chief also promised not to devalue the naira again.

    The decline in the prices of oil since mid-2014, cut government revenue and triggered currency controls that crippled industries and contributed to contraction of the nation’s economy.

    Last June, the authorities removed a 15-month currency peg to attract inflow. Although the naira has plummeted almost 40 per cent since the unit was floated, traders said it is still being managed by the government. The rebound in oil prices has helped the country in boosting its forex reserves to $26.7 billion as of January 10.

    According to Gwadabe, the BDCs Weekly Rate was launched to make it a reference point for realistic rates in the market that will boost foreign investment inflows, displacing the damaging effect of foreign media platform like Abokifx.com to the economy.

    Gwadabe was confident that with the gradual recovery in crude oil prices, enhanced commitment of the CBN to economy diversification which has led to rising production of local rice and drop in import bills, as well as President Muhammadu Buhari’s political will to implement key economic reforms, the task of achieving a single determined exchange rate will be achieved.

    He urged the media and general public to adopt a single rate in their reporting and forex dealings, and also always quote rate on the ABCON website- www.abcong.ng for consistency and uniformity of reporting.

    The ABCON chief reiterated the need for the public to deal with CBN-licensed BDCs only and urged the public to report errant operators for necessary sanction.

    “ABCON wishes to reiterate its willingness to embark on a comprehensive media campaign on the roles, activities and location of members nation-wide so as to provide a guide to the public in dealing with only CBN-licensed BDCs and for the public to report any errant operator for necessary sanction”, he said.

    Gwadabe informed that the CBN will impose between N500, 000 to N2 million fines on any BDC operator that violate regulatory policies and while such operators may also face license suspension.

    He called for public support for ABCON’s determination to highlight positive rates development in the market through the BDCs Weekly Rate for media coverage which was launched at the event.

    “We also seek your support and partnership to assist the CBN and government to eliminate or reduce to the barest minimum, activities of parallel market operators. We also want to, through our partnership with you, give visibility to registered BDCs in the market and create more awareness on the role of operators in selling forex to the retail end of the market,” he stated.

    The ABCON chief spoke of the need for the CBN and Federal Government to harmonise the multiple official exchange rates in the country and adopt a unified rate for transactions.

    Calling for the adoption of a single forex market rate system, Gwadabe said that licensed BDCs will post an exchange rate every Monday on its website from January 16 to “highlight positive rate development in the market” and counter domains such as Abokifx.com, which publishes ‘high’ unofficial prices daily.

    Trading in the parallel market became more regular since 2014 after the CBN strengthened capital controls as crude oil prices tumbled at the global market. Dollar trades for about N490, compared with the official rate of about N315.

    Gwadabe, who said that the BDCs will initially quote a rate of N399/$, added that the parallel market rates will be disregarded as they were not recognised by law, raising the hope that exchange rate will continue to improve in the course of the year, despite the challenges being faced in the forex market.

    Stakeholders seek transparent price discovery

    Associate Research, Eczellon Capital Limited, Mustapha Suberu, said there was need to allow a transparent price discovery in the market, which he believed would stimulate dollar inflows into the economy and subsequently, lead to local currency stability.

    He called for more transparent forex market that would allow foreign investors to invest in the economy and bring about positive market-determined rate.

    Managing Director, Afrinvest West Africa, Ike Chioke, said the incorporation of a long-term diversified strategy in fiscal policy is required to cushion shocks in various segments of the economy and revive the naira.

    To him, the persistent pressure on the naira could have been minimised if a counter fiscal policy had been developed, as the CBN cannot continue to defend the naira with foreign reserves.

    Chioke said: “To reduce this pressure, an inward looking policy (tax incentives, infrastructure development and production subsidy) should be emphasised to reduce the dependence on imported goods.”

    Apart from oil receipts, the development of the agricultural sector will in the short-term reduce the forex burden of food imports and on the long run, enhance foreign receipts if its comparative advantage in the sector is efficiently deployed.

    A BDC Operator and Managing Director, E.M Consolidated Investment Limited, Emeka Moses, said the BDCs always make returns to the CBN which monitors and sanctions defaulters.

    He said the introduction of Bank Verification Number (BVN) has made it easier for the CBN to detect and monitor BDCs for compliance.  “I want the CBN to continue to carry out spot checks on BDCs and ensure that those that violate regulatory guidelines are sanctioned”, he said.

    Moses said the portal will enables the public to know the prevailing rate at each day and demand adherence to such rate during transactions.

    “If the public knows the rate, it will be easier to detect and spot BDCs that sell above such rate, and get them reported to regulators,” he said.

    A former Executive Director with Keystone Bank, Richard Obire, said that the implementation unified rate across all CBN- registered BDCs by ABCON will bring sanity to the forex market. Obire said: “I do not know how the group wants to achieve this but if well implemented, it will bring orderliness to the market. It is easier to achieve such feats Personal Travel Allowance and Business Travel Allowance transactions.  It is really a good initiative that will reduce the level of uncertainty in the market.”

    Revenue leakages on Diaspora funds lingers

    The Federal Government has been losing billions of dollars as Nigerians in Diaspora avoid official transactions when remitting dollars home.

    Going by the figures released by Senior Special Assistant to the President on Foreign Affairs and Diaspora Matters, Mrs. Abike Dabiri-Erewa, Nigerians in the Diaspora sent home $21 billion in 2015, which boosted the local forex market last year.

    Mrs. Dabiri-Erewa said: “In 2016, they remitted $35 billion which is higher than what was remitted in 2015. This remittance by Nigerians living abroad is the highest in Africa and the third largest in the world.”

    But Gwadabe disclosed that less than five per cent of the $35 billion remitted in 2016 was officially captured by the CBN because of exchange rate divergence, which discourage Nigerians in Diaspora from sending their funds home through official channels.

    He said that harmonisation of the multiple exchange rates in the country, will make the rate for Diaspora remittances more attractive to Nigerians in Diaspora.

    His words:  “The single forex rate has succeeded in Egypt. Nigeria should block all forex leakages to make it work in the country. Forex market is an information-driven market. The type of information you release helps to swing rates and would also help the CBN’s plan to achieve single exchange rate,” he said.

    Gwadabe said the ABCON has been working very hard to build public confidence in registered BDCs because the forex market is driven by perception adding that the ideal rate for the naira is N400/$ even as speculation is hurting the local currency.

    He urged the CBN to stop banks from selling Personal Travel Allowances (PTAs) and Business Travel Allowances (BTAs) to travellers and assign the role to BDCs.

    Will economic buffers save the naira?

    Gwadabe urged the Federal Government to build strong buffers for the naira to withstand headwinds that come during economic crisis like in other climes.

    The United Arab Emirates (UAE) for instance, has more than $400 billion in their reserves. The buffer is big enough for UAE to protect its local currency at any given time.

    “But the Federal Government and the CBN have stood their ground for a very long time by not allowing naira to float freely. The advantage of the flexible forex regime is that the volatility you see, whereby naira everyday is getting weaker, once it goes up, another thing will bring it down,” he said.

    Continuing, he said: “The fact is that when you talk of BDCs, there are parallel market operators and black market operators. The parallel market is the opposite of official market.

    “So, the BDCs are not parallel market operators. There are over one million parallel market operators in this country and they have been here even before the coming of the CBN. They have been here even before the CBN licensing the BDCs in Nigeria”.

    Noting the big difference between a parallel market operator and his BDCs counterpart, he said:  “And if you look at it, last year, we were branded the black sheep in the industry. In India, the BDCs generate over $30 billion from the Diaspora remittances.

    “In United Arab Emirates, the entire banking needs of banks are met by the BDCs. The working of the Lebanon economy is highly dependent on the activities of BDCs in that country. I want stakeholders to support Nigeria BDCs in building the economy.”

    BDCs embrace automation of processes

    On the ongoing automation of BDCs’ operations that will help online real-time operations and enhancement of compliance among operators, Gwadabe said the facility would boost operational transparency, ease of public accessibility of BDCs’ procedures, returns rendition and regulatory supervision.

    Gwadabe said: “We want to introduce certification for registered BDCs. The ABCON is also coming up with schools that will train and retrain members and encourage record keeping. We believe that once we are able to introduce measures that make the operations of parallel market irrelevant, they will be eradicated.”

    He said that ABCON members have been pushing to become sole handlers of PTA and BTA and also raising their operational modalities to ensure they become agents of International Money Transfer Operators (IMTOs).

    Gwadabe said that despite the challenges facing the economy, the CBN and BDCs will continue to work together and find sustainable solutions that can help the country wriggle out of the ongoing forex crisis and achieve full economic recovery.

    He said: “We have continuously assured the CBN and taken appropriate measures to ensure that purchased funds are disbursed to end users and for eligible transactions only. We also render weekly returns on purchases from the banks to Trade and Exchange Department of the apex bank. We also ensure strict compliance to the provisions of the anti-money laundering laws observance of appropriate Know-Your-Customer principles in the handling of forex transactions.”

    The CBN, last week, confirmed the operating licenses of 3,147 BDCs that met its N35 million mandatory capital base. The reviewed list was the first since May 29, last year, when the apex bank approved 2,998 operators to meet customers’ forex needs at the retail-end of the market.

    The CBN said the new approvals in BDCs were in line with its plan to deepen the forex market by getting more operators involved in the retail-end of the market.

    Gwadabe said that the licensing of new BDCs was a positive development that is expected to deepen dollar liquidity in the system.

    Disclosing that the apex bank has a mandate to review the list of operators on quarterly basis, Gwadabe added that the list grew to 2,998 from 1,400.

    “There are more approvals expected. It is a welcome development,” he said.

  • Will exchange rate unification save the naira?

    Will exchange rate unification save the naira?

    For years, direct transfer of funds to foreign bank accounts was stress-free for Nigerians. But gone are those days when such transfer was done at low rates. The exchange rate for international bank transfer was at N505 to the dollar at the weekend, painting a gloomy picture of what to come in the months ahead. Stakeholders are calling on the Central Bank of Nigeria (CBN) to fully allow the naira to float. They want the apex bank to launch the process of unifying the multiple exchange rates in the economy, writes COLLINS NWEZE. 

    What the naira is undergoing major crisis is no longer news. But the declining purchasing power and exchange rate of the local currency against world currencies, especially the dollar, has become worrisome.

    The purchasing power and value of the naira expressed in terms of the amount of goods or services that one unit of it can buy has continued to decline.

    Also nose-diving is its exchange rate in international transactions against the dollar.

    For the first time in decades, the rate for international bank transfers soared to N505/$ at the weekend. The naira-dollar foreign transfer rate has for months resisted the pressure to cross the N500/$ mark in all transactions despite continuous dollar scarcity.

    The new foreign transfer rate of N505 to the dollar is at least, N200 above the N305 official rate of exchange, which many analysts see as unrealistic and ineffective price of the local currency against the greenback.

    Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, who confirmed the international bank transfer rate at N505/$, insisted that the naira under the current market regulatory framework will remain unstable until the market is allowed to operate efficiently.

    He described the state of the official exchange rate as unrealistic given that forex traders and users cannot get dollars at that price unconditionally. The naira was trading at N495 to the dollar in the parallel market at the weekend.

    He said: “Any market structure where the same product is selling at different prices at the same time is described in economics as a price discriminating monopoly market structure. Typically, this market is characterised by barriers to entry that allow those with influence or connections to buy in the cheaper market, such as N305 to dollar, and sell in the more lucrative market, at N500 to dollar. This is what is probably happening right now (round tripping),” he said in an emailed report to investors.

    President of the Association of Bureau De Change Operators of Nigeria (ABCON), Aminu Gwadabe, has called for the harmonisation of the multiple exchange rates currently at play in the country.

    No fewer than 10 operational exchange rates exist, depending on the purpose and the market where the dollar is bought or sold, adding that there is currently a total dysfunction of the forex market, which became more pronounced after the June 20 implementation of the flexible forex policy.

    He listed them as the budget exchange rate (N305/$); Form ‘M’ processing rate (N285/$); Inter-bank rate (N315/$) and International Money Transfer Operators (IMTOs) rate (N375/$). Also, the BDCs rate (N399/$); Western Union (N450/$); Airline intervention rate (N355/$); pilgrimage rate (N197/$); parallel market rate (N485/$) and the CBN rate (N305/$).

    “I suggest a weighted average rate of between N350 and N400 to dollar to bring calmness to the market and attract dollar inflows into the economy. Once the exchange rate is harmonised, the parallel market will shape up,” Gwadabe said.

    Rewane said the outlook for the naira for this year can only be clearer by examining the fundamentals that determine exchange rates.

    He was also puzzled by the country’s failed attempts to unify its exchange rates, saying: “Forex policies usually complement trade and investment policies. The Nigerian government will in 2017 strive towards greater coordination of these policies, and will move from its current bias for a command economy monetary policy towards a mixed economy.

    “I believe that with oil prices at $55pb and production back up to 2mbpd, the naira will slip in the interbank markets to N350-N380 to dollar. It will fall in the parallel market to N520 to dollar before recovering sharply to N425 to dollar. These projections are based in the assumption that the market will be reformed and that sanity will return to what is now essentially a foreign exchange asylum.”

    He described the forex market as a product of policy-making regulatory and market player interaction.

    “Many fundamentals”, he said, “go into the determination of an exchange rate. These include balance of trade, the terms of trade, investment flows and the international competitiveness of the economy. There is also the interest rate/inflation differential, which impacts the purchasing power parity of the currency.

    “When a currency is appropriately priced, it will be in equilibrium and will have minimum deviation from the real equilibrium exchange rate path. When you test the Nigerian case against a number of these indicators, it is not far-fetched to see why the Nigerian currency value is misaligned from its monetary policy anchors. It is also clear why there has been a slow but consistent erosion of confidence in the naira.”

    Rewane noted that rational investors and domestic economic agents always make decisions in their own enlightened self-interest and not because of emotional and irrational considerations.

    He went on: “Historically the Nigerian economy, and by implication the naira, has been a beneficiary of oil windfalls and a victim of oil shortfalls. History shows that after a windfall, the naira remains relatively stable for an average of five to six years before the next oil shock.

    “Immediately after every shock, the government embarks on adjustment measures including devaluation. However, since 2008 the shocks have become more frequent and shattering. The time frame of the shortfalls has also been much longer and the impact more devastating.”

    He said the unified flexible exchange rate usually forms an important component of an interventionist or state led economic development model but the consequences include pervasive state intervention in the economy, financial repression, restrictive trade regimes and closed capital accounts.

    He said that multiple exchange rates always lead to distortionary trade regimes, exchange controls leading to the stunting of the export sector and reduced forex earnings. It has also led to misallocation of resources, lower fiscal revenues and a smuggling boom and rent-seeking activities, driven by a complex set of administrative controls.

    Rewane said that for Nigeria to escape from this forex trap, the authorities must understand the need for a properly functioning market.

    His explanations: “A well-functioning forex market allows the exchange rate to respond to market forces and reduce market distortions. Russia and Kazakhstan recently did this and their currencies sank for a short period and then recovered sharply. On the other hand, Venezuela fell into the trap and has become a basket case.

    “The CBN will need to eliminate or phase out regulations that stifle market activity and create a sense of two-way risk in the market as well as reduce its market making role while stopping indirect or overt rate determination.” The economist also urged the apex bank to increase market information on the sources and uses of foreign exchange and be firm in dealing with market infractions.

     Multinational companies hit

    Assistant Manager, Equity Research at Financial Derivatives Company Limited, Augustine Onwunali, identified the companies at the receiving end of exchange rate translation losses as mostly multinational companies (MNCs).

    He said: “Nigeria is an import and commodity-dependent economy, and therefore vulnerable to exchange rate volatility. Nigerian corporates that conduct international trade depend on Letters of Credit and financing from parent company.

    “Parent company credit is an integral part of financing for MNCs. Prior to the current forex issue, these companies usually used their profit in netting against forex translation losses.

    “But the significant depreciation of the naira has resulted in monumental forex translation losses that have wiped out earnings. In addition, making sales in naira and having to repay dollar-denominated losses has put margins under pressure.”

    Listing some of the affected companies as Lafarge, Guinness, and Nestle, he explained that these losses are not peculiar to companies in the stock market as other companies such as airline have had to bear losses associated with foreign exchange translation.

    “The exchange rate vulnerability has resulted in an evolution of the cost structure of many Nigerian companies, and those that survive will be those with adequate strategy aimed at ensuring cost efficiency. Forex losses are one-off expenses that can be managed with adequate strategy. If Nigeria transits into a flexible exchange rate regime, then MNCs will be able to hedge against both commodity and currency risks,” he added.

    According to him, the MNCs have been able to hedge against commodity risk but the vagaries the forex market makes hedging against currency risks intractable. Though dampened consumer demand has affect revenue growth for Nigerian corporate, effective management of forex risks will ensure their survival.

    Speaking on the state of the exchange rate, Head of Treasury at Ecobank Nigeria, Olakunle Ezun, said the exchange rate uncertainties will persist due to sustained low oil prices, lower forex reserves, and robust import demand.

    “We expect a managed interbank exchange rate of NGN305.50 and a parallel market rate of NGN495 in 2017. Naira will remain under pressure largely due to a structural imbalance between dollar supply and demand, which will be reflected in proliferated forex market and rates,” he said.

    According to Ezun, inflation will likely accelerate towards 20 per cent by the end of June this year, driven by fiscal expansion, energy cost and high forex cost caused by over 30 per cent naira devaluation 2016.

    He said 91-day T-bill yield will likely remain around 16 per cent through 2017 assuming the CBN maintains its tight monetary stance while the currently inverted yield curve is likely to moderate as we move into 2017. Also, bond yields remain relatively elevated between 15 to 16 per cent. But, assuming the market’s exchange rate expectations settle they could start to fall moderately.

    Ezun predicted that a further decline in oil prices, will add pressure on forex reserves, and in turn undermines naira.

    Nigeria has been grappling with currency crisis since crude oil prices dropped by about 43 per cent from an average of $100.35 throughout 2014 to an average of $57.20 for the first six months of last year. It closed at $55 per barrel at the weekend.

    The drastic fall in the price of crude oil, which constitutes the largest component of Nigeria’s forex reserves has cut dollar earnings from about $3.2 billion monthly to about a billion dollar for the same period. This has negatively impacted on the value of the naira.

    The impact is reverberating at home and abroad. Parents whose wards school abroad are feeling the pang of the dollar scarcity, which makes it difficult for them to settle tuitions.

    CBN’s 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 on June 27 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 CBN had imposed some currency control measures to save the naira. In June last year, it curbed access to the interbank currency market for importers bringing in a variety of goods.

    In an effort to conserve its dollar reserves, the bank said importers could no longer get hard currency to buy 41 items, ranging from toothpicks and rice to steel products and private jets as well as what the bank classified as finished products.

    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 financial markets, and all in all, a thriving economy.”

    Koko explained that the OTC Forex Futures contract is an effective exchange rate management tool supported by a transparent price driven by two-way quote market. The contracts will assist the CBN in managing the volatility in the spot forex market, thereby promoting stability and entrenching confidence in the forex market.

    The spot rate is the price quoted for immediate settlement on a commodity, a security or a currency. The spot rate, also called “spot price,” is based on the value of an asset at the moment of the quote.

    FMDQ Chairman and CBN Deputy Governor in charge of Economic Policy, Dr. Sarah Alade, also said that the innovative product will bring liquidity, transparency, price formation and diversification into the forex market, making the market globally competitive.

    She said the introduction of the OTC Forex Futures market will encourage end-users to spread out their demand for spot forex deals as they are now able to lock down the exchange rates for future forex requirements.

    Mrs. Alade said: “This has the potential to eradicate the constant front-loading of forex requirements and minimize the disequilibrium in the spot forex market.

    “End-users will make better judgment as to the timing of accessing the spot forex market. The availability of the OTC forex futures will improve the business planning practice of end-users and forex sellers, as the future exchange rate is guaranteed through the OTC forex futures.

    Exchange rate issue as nationa discourse

    To Rewane, exchange rate has been a national discourse in recent time. He recalled that the country had suffered similar fate in the past from an overly con-trolled currency.

    Rewane said in an on-line report: “From 1981 to 1985, during a similar period of control and oil shocks, relative prices did not adjust to restore internal and external balances. This led to low production, economic distortions, massive retrenchment, poverty and higher unemployment.

    “In contrast, from 1986 to 1991, when the structural adjustment program was introduced, the exchange rate was flexible. Economic data showed that there was increased output, better employment figures and less poverty. Both periods had negative oil price shocks.

    “Nigeria’s current managed floating exchange rate regime combines features of both the fixed and flexible exchange rate. A lightly managed floating exchange rate regime is advocated given that the exchange rate becomes determined essentially by demand and supply forces, while allowing the CBN to intervene occasionally to moderate excessive fluctuations, which are prone in developing countries such as Nigeria.”

    Besides, other factors like terms of trade, inflation differential, public debt, current-account deficits, interest rates, political stability and the overall economic health determine the exchange rate of a currency.