The naira has lost 30 per cent of its value against the dollar this year despite the adoption of the flexible forex policy by the Central Bank of Nigeria (CBN). The woes are coming from dollar-demand pressure from home and abroad at a time dollar-export earnings are on the decline due to oil price free fall. But the CBN is making efforts to rescue the troubled currency. The kick-off of the naira-settled Over-the-Counter (OTC) Forex Futures Market and moves to resume dollar sales to Bureaux de Change operators are some of the apex bank’s intervention, writes COLLINS NWEZE.
hat the naira is troubled is no longer news. What continues to resonate is the impact of the local currency on the lives and businesses of the citizenry.
Henry Ekwueme, an employee of a multinational oil company, had a bite of the exchange rate crisis while holidaying in the United States (U.S.). It all started mid last month when he wanted to check into a hotel in Vegas, Nevada, by paying a $1,600 bill with his debit card. The transaction was declined.
He quickly called his bank in Nigeria to enquire what had gone wrong, since the account was well funded.
“You can only access $300 daily limit because of the ongoing foreign exchange crisis in Nigeria. It is better you pay with cash or use multiple cards to cover the bill,” Ada-Obi Michael, his account officer, advised him.
Ekwueme quickly opened his wallet and brought out five more Automated Teller Machine (ATM) cards and settled the bill. How he survived his 10-day stay in the city was a surprise.
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 $48.09 per barrel at the weekend.
Specifically, 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.
The Central Bank of Nigeria (CBN) Director in charge of Monetary Policy Department, Mr. Moses Tule, explained that the restriction might continue until there is an improvement in forex earnings. According to him, if banks had not restricted the use of ATM cards abroad, some of them would have been experiencing challenges meeting the demand of their overseas’ customers.
Such occurrence, he said, would have caused huge liabilities in the balance sheet of the banks, balance sheet thus affecting their operations.
Mr. Tule said that much as the CBN sympathised with depositors for the inconveniences they go through in their transactions abroad, there was little the bank could do to reverse itself.
Tule said: “The limitation on the use of debit or credit cards outside the country was not a limitation that was placed by the CBN.
“They were restrictions that Money Deposit Banks (MDBs) placed because their customers have to settle whatever transactions make with your debit cards with corresponding banks in foreign currency.
“And if the banks do not have the foreign currency to do that, then such customers create a liability problem for them.”
The priority of the CBN, he said, would be to use the forex to settle matured Letters of Credit for the importation of petroleum products and other raw materials.
The local currency has been devalued by 35 per cent in the last 13 years. In 2001, the CBN cut its value by 27 per cent, followed by the latest per cent slash of eight per cent.
In a country stricken by 15.6 per cent inflation in May, one of the world’s worst; and declining foreign exchange reserves (now at $26 billion from about $42 billion a year ago), the state of the local currency cannot but be worrisome.
As of the last count, more than 10,000 employees of Bureaux de Change have been sent to the job market following the stoppage of weekly dollar sales to operators by the apex bank.
President, Association of Bureau de Change Operators of Nigeria (ABCON), Aminu Gwadabe, who confirmed the development, said many operators have closed shop since the CBN suspended dollar sales to them in January. He warned that the entire industry may collapse if nothing is done to reverse the trend.
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.
On how it works, Koko said: “If a bank buys OTC Forex Futures contract rate at N260 to dollar but on the due date, the spot forex market has climbed to N270 to dollar which is higher than the OTC Forex Futures contract rate of N260 to dollar.
“The Clearing House, Nigeria Interbank Settlement System (NIBSS), will pay the bank N10 for every dollar, thereby bringing the bank’s effective rate to N260 to dollar which is the OTC Forex Futures rate.
“Both parties end up with an effective rate of $/N260.00 as this was the guaranteed rate for both parties. If Nigerian Inter-Bank Foreign Exchange Fixing (NIFEX) had been N250 to dollar on maturity date, the purchasing bank would pay CBN N10 per dollar.”
Already, the CBN and Citibank have implemented the first naira-settled futures trade against the dollar, market regulator FMDQ OTC Securities Exchange said. But the rate at which the futures deal was done and the size of the trade was not disclosed.
CBN Governor Godwin Emefiele said the Flexible Exchange Rate Inter-bank Market policy is still on trial and would soon make room for more stakeholders including (BDC) operators to participate.
Speaking at the interactive session between the BDCs and CBN on the new policy and state of the forex market, the apex bank chief said all hopes to include operators in the policy guidelines is not lost, while also acknowledging the impact of the policy on BDC businesses.
The broad framework and guidelines of the Flexible Exchange Rate Inter-bank Market was released by the apex bank on June 15 when it restored the automatic adjustment mechanism of the exchange rate with the re-introduction of a flexible inter-bank exchange rate market.
The CBN said the workings of this market will be consistent with its objectives of enhancing efficiency and facilitating a liquid and transparent forex market.
Emefiele said: “The CBN wants to accommodate and carry all stakeholders along. All that management is requiring for the BDCs is to be more patient. The new policy is being tested. Efforts will be made to see how the BDCs, which are critical to economic development, will be carried along.”
He said the CBN will review the BDC operational guidelines to ensure thay are in line with regulatory requirement and prepare the operators for the task ahead.
Emefiele said the exchange rate would be purely market-driven, using the Thomson-Reuters Order Matching System as well as the Conversational Dealing Book.
He insisted that the workings of the inter-bank trading are consistent with the CBN’s objectives of ensuring efficiency and facilitating a liquid and transparent forex market.
According to Gwadabe, the CBN had injected $4.2 billion into the market to kick-off the new policy regime, a step he noted, helped to address unmet payment obligations promoting market volatility.
He identified the first concern over the policy as the complete exclusion of BDCs from the new forex regime, stoppage of dollar sales to operators, new guidelines that restricted the business of operators as well as various circulars designed to hurt BDC operations.
Gwadabe said: “The present situation in the forex market is skewed against BDCs and the result is the huge gap between the interbank and parallel market forex rates, which provides opportunity for sharp practices.”
No respite yet for naira
The naira tumbled to a record low of N295.25 to the dollar in the interbank market at the weekend, from between N282 and N285 it had been exchanging since the flexible forex policy started.
The local currency, which was quoted at N365 to dollar on the black market, weakened against the greenback despite huge dollar sales by the CBN to boost liquidity on the interbank market.
The woes of the naira will worsen in the coming months, with the local currency expected to exchange for N390 to the dollar at the close of the, report by Renaissance Capital (RenCap), an international investment and research firm has said.
RenCap’s Sub-Saharan Africa (SSA) Economist Yvonne Mhango said the liberalisation of forex markets by the CBN led to positive sentiment in the equities market, with banks up by nine per cent since the plan was announced on 15 June.
However, she said sentiment risks being dampened by concerns around Brexit and the implications for the naira, as capital inflows from foreign investors may not materialise as rapidly as the CBN may have expected.
Sewa Wusu, Head of Research at SCM Capital Ltd. said: “We have used a N285/$ exchange rate in updating our models but the risk is to the downside, and we see N390/$ by end of this year,” she said in a report titled: ‘Nigerian banks: Life after ‘40’.
“The CBN sold dollars to the interbank forex market for a third day to try to ease dollar shortages after it floated the currency. The regulator has intervened in the market by selling foreign exchange since it ended the currency’s 16-month fix of 197 to 199 per dollar on June 15.
“It sold $4 billion in the spot and forwards markets that day to clear a backlog of demand for hard currency, and followed that with about $100 million of sales on the spot market the following day.
“The market expects the CBN to continue to intervene on a daily basis for now as it is easily the only source of dollar supplies.
“Foreign direct investment and portfolio flows are yet to start flowing in as investors wait on the sidelines to watch for liquidity, price discovery and stability.”
CBN Deputy Governor in charge of Corporate Services, Adebayo Adelabu, said the regulator remains a participant in the interbank market, at least in the short term, to ensure that sufficient liquidity is available to facilitate two-way trade.
He said at news conference in Lagos that the CBN’s decision to adopt flexible forex rate which allows only one single market structure where rates are determined by market forces has been long-awaited by local and international investors.
“The policy is expected to boost investors’ confidence and get more dollar into the system”, Adelabu said.
Managing Director/CEO, Tempo Paper & Packaging Limited, Seun Obasanjo, said the flexible forex policy implementation will an immediate rise in energy prices and Customs duties.
In a chat with The Nation, Obasanjo said consumers of local goods should prepare to absorb a minimum of 15 per cent rise in cost of products, as higher cost of energy and Value Added Taxes (VAT) are into the prices of goods.
He said that with the new policy, people’s purchasing power has been eroded adding that the country is not out of the woods. He said the Customs calculate duties on imported raw materials using the official rate which moved from N197 to dollar to N281 to dollar on Monday after the flexible forex policy started.
Obasanjo, who manufactures corrugated cartons and flexible packaging for different items such as confectionary, bread, noodles, spaghetti among others, said pricing for gas, is also done using the official rate, and will now be adjusted to the new rate.
The manufacturer said the Customs will have no choice than to adjust its template of duties, which means more revenues for government.
“I see the Customs revenues jumping in the months ahead but manufacturers are going to pass the higher duties’ to consumers. It is painful but we have no other choice,” he said.
Continuing, he said that although the policy was meant to attract Foreign Direct Investment (FDI), but it may not come.
Obasabjo said: “FDI may not come. Even if there is foreign direct investment inflow, it will not save the economy. Diversification of the economy is the answer and people should start patronising made-in Nigeria goods.”
He believes that to get the local industry into the league of players where it can begin to act with full capacity in the production of goods and services, government needs to step in by providing the needed infrastructure.
He said: “It is not a one direction approach. All hands must be on deck to get Nigeria to its desired destination of being an industrilised nation.
“By fixing power alone, the cost of production of goods and services will drop significantly, helping the operators to compete in the global market.
“The same thing applies to low interest rate which is needed to make the manufacturers also compete favourably by reducing the cost of their operations.
“If I am producing everything in Nigeria, it means Nigerians will be employed starting from drivers, cooks, secretaries, cleaners, gardeners and even security personnel.
“If the farmers are producing locally, it will improve their capacity overtime and also create jobs. It will help Nigeria to leapfrog from consumption-based economy to production-based economy. We can even become a net exporter of several items.”
On other benefits to local production, he said: “Instead of scrambling to buy dollars, the manufacturers can earn dollars and strengthen the local currency.
“It has to be a coordinated effort and the policy needs to be encouraged. The support should come from all stakeholders. Although some people are going to lose out in the short-term because they are importing these items, but if we boost the local production capacity, on the long-run, we will all be better off.”
Managing Director, Financial Derivatives Company Limited, Bismark Rewane, said the exchange rate has been a hot topic of debate in recent months, adding that this is not the first time Nigeria has suffered 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.
Managing Director, Afrinvest West Africa Plc., Ike Chioke said a strong positive correlation exists between the exchange rate and crude oil price in the country.
In a report titled: Naira trending towards 2015, Chioke said: “Nigeria’s crude oil – bonny light, which traded at $110.2 per barrel in January 2014, reaching $114.6 per barrel by June last year, is now trading below $60 per barrel.
“With the discovery of the shale oil, crude oil prices are projected to moderate in coming years. In addition, the threat by the United States (U.S.) to reduce oil imports constitutes a downside risk on crude receipts of OPEC members. Consequently, the CBN must establish a ‘real’ and ‘sustainable’ value for the naira as the opportunity cost of ‘substantial’ support for the naira increases.”
