The naira remains unpredictable despite the efforts of the Central Bank of Nigeria (CBN) at defending it. CBN is to poised to stabilise the naira, even at the expense of exernal reserves, writes COLLINS NWEZE.
When the Central Bank of Nigeria (CBN) Governor Sanusi Lamido assumed duties about five years ago, one of his major plans was to achieve exchange rate stability. While the currencies of most emerging markets lost appreciable value, in double digit range, as at January 30, the naira has lost only 1.3 per cent of its value in the last one year.
The currency’s stability was partly driven by CBN’s direct intervention, and to a lesser extent, improved dollar supplies from its twice weekly Retail Dutch Auction System (RDAS) window. The currency closed at N162.4 to a dollar last Friday. Still, the currency remains under pressure because of structural imbalance between dollar supply and demand; and lower United States oil demand.
Sanusi described as unnecessary and uninformed, the occasional criticism that the CBN has been unduly protecting the naira exchange rate, to the detriment of other macro-economic variables. The critics, he said, did not give due consideration to the negative implications of the attendant loss of confidence by international investors in the economy.
Managing Director, Financial Derivatives Company, Bismarck Rewane, said the divergence between the official and parallel markets had widened to N20 or 12 per cent of the official exchange rate, adding that the economy is more exchange rate sensitive than interest rate. This, he said, means that a depreciating currency will have a direct impact on inflation and could be counterproductive.
External Reserves
The economy had last year recorded some impressive macroeconomic achievements despite some challenges. In specific terms, the country recorded strong Gross Domestic Product (GDP) growth, single digit inflation, exchange rate stability and capital market recovery.
However, contrary to the government’s projection of a $50 billion gross external reserve, it managed to close the year at $42.85 billion. The figure represented a decrease of $0.98 billion or 2.23 per cent compared with $ 43.83 billion at end- December 2012.
The Monetary Policy Committee (MPC) meeting of January 17, 2014 noted that the decrease in the reserves level resulted largely from a slowdown in portfolio and foreign direct investment flows in the fourth quarter of last year. This also led to increased funding of the foreign exchange market by the CBN to stabilise the currency.
The MPC, again, expressed concern over the continued depletion of the Excess Crude Account (ECA), which balance stood at less than $2.5 billion on January 17, 2014 compared with about $11.5 billion in December 2012. “This absence of fiscal buffers increased our reliance on portfolio flows thus, constituting the principal risk to exchange rate stability, especially with uncertainties around capital flows and oil price,” the committee noted.
It said accretion to external reserves remained low while much of the previous savings have been depleted, thereby undermining the ability to sustain exchange rate stability. The Committee, therefore, urged the fiscal authorities to block revenue leakages and rebuild fiscal savings needed to sustain confidence and preserve the value of the naira.
Currencies analyst at Ecobank Nigeria, Olakunle Ezun said by raising the public sector deposit, the CBN raised concerns about rising inter-bank liquidity and huge cost of monetary operations. “While there was no change to exchange rate policy, the CRR effect will be positive for the naira given the expected reduction in liquidity,” he said.
He said there was no immediate impact of the policy on interbank rate, since market liquidity is still over N1 trillion. According to him, the short end of the curve remain attractive, as concerns over naira and inflation outlook continue to influence CBN’s monetary policy regime in short term.
Global economy
Emerging markets, including Nigeria, that were major beneficiaries of cheap money from the developed nations stimulus could experience financial market instability as tapering begins. However, the United States authorities have made it clear that they remain sensitive to the impact of their domestic policies on global markets and will, therefore, aim to minimise disruptions.
Besides the concerns over the United States quantitative easing plan, Nigeria’s heavily reliant on oil revenues which at the time was witnessing a fall back in prices, were of grave concerns to stakeholders and key operators of the economy. Nigeria depends on oil shipments for 80 per cent of government revenue and 95 per cent of its export income, according to data from the Federal Ministry of Finance.
Policy measures
The MPC had left its policy rate unchanged at a record 12 per cent for more than two years consecutive meeting on January 17, concerned that excess naira in the system would trigger dollar demand, weaken the naira and exacerbate inflation.
Also, the CBN raised the level of Cash Reserve Ratio (CRR) on public sector deposits from 50 per cent to 75 per cent. Despite these measures, the naira declined as dollar inflows slowed.
Also, last month, the CBN removed the maximum weekly forex sales to Bureau De Change (BDC) operators. The action, contained in a circular to Authorised Dealers and BDC operators, said the step was meant to shore up liquidity in the forex market. Dollar scarcity in the market had affected naira exchange rate in recent months, hence, the policy review.
The circular, signed by CBN Director, Trade and Exchange, Batari Musa, said the policy review followed the circular of September 26, last year in which a limit of $250,000 was put in place.
“All authorised are hereby informed that the provisions of paragraph (1) of the circular under reference have been reviewed with immediate effect. Consequently, the limit of $250,000 as the maximum weekly forex sales to BDC is hereby removed in order to shore up liquidity in that segment of the foreign exchange market,” he said.
Henceforth, authorised dealers are free to sell forex to BDCs subject to compliance with the provisions of extant Anti-Money Laundering/Financing Terrorism laws and regulations in the disbursement of forex.
“Furthermore, all transactions between authorised dealers and BDCs as well as the latter and end-users must be supported with appropriate documentation,” he said.
Musa said authorised dealers and BDC operators are to continue to render weekly returns on their transactions to the CBN and other relevant regulatory agencies, failing which appropriate sanctions, including revocation of operating license shall be imposed.
RDAS
In September, the regulator replaced Wholesale Dutch Auction System (WDAS) with Retail Dutch Auction System (RDAS) because of the ineffectiveness of the former in addressing hitches in the forex market.
It also withdrew the licences of 20 bureaux de change (BDCs) operators for violating forex rules, an indication that more licences withdrawal may be seen in future, should the violation continue.
Under the RDAS, banks and other authorised dealers place bids on behalf of individual clients who qualify to buy forex at the official auction. The change from WDAS to RDAS allows the authorities to monitor more accurately various sources of forex demand and any potential duplication of forex demand in the system. Banks will remain responsible for all documentation requirements.
By adopting the RDAS in place of WDAS, the CBN is now able to closely monitor forex utilisation of each customer and sectors of the economy for documentation and policy formulation. This protects foreign reserves from depletion and saves the naira.
Inflation
Even though inflation has stayed under 10 per cent for more than a year, somehow meeting CBN’s target, analysts are of the opinion that it would return to its familiar double-digit terrain, if the bias towards weaker naira continues. This, mainly a fallout of the import dependent economy.
Rewane said the pressure on the naira will persist in the absence of foreign capital inflows, and especially if there are further outflows.
He insists that there is no reason markets cum economy should swerve to the slightest wind emanating abroad. Whether one likes it or not, the impact of external forces on Nigerian markets is still pronounced, and will remain so until there is paradigm shift that considers other sectors of the economy, outside oil.
Managing Director, Afrinvest West Africa, Ike Chioke said the pressure on the naira arose from a combination of falling oil production and portfolio outflows as foreign investors adjusted their positions in light of Fed comments.
“The import of that is; could there have been multiple foreign exchange earning sources, nobody would have lost sleep over oil as an oil price tumble wouldn’t have created undue uncertainty about future external reserves position and the ability of the CBN to defend the naira,” he said.
He said there is need to consistently monitor the impact of hot money in Nigeria’s markets and to grow local participation from nationals and in the Diaspora.
Naira’s long history of depreciation
The naira depreciated by N101.50 to N102.10 to dollar in 19 years, from 1980 to 2000, when compared with N0.6 to dollar it traded as at 1981, Afrinvest Research said.
In a report obtained by The Nation, the firm said not even the Structural Adjustment Programme (SAP) introduced in 1985 could have predicted this steep slide. It said the naira first hit double digits moving from N9.9 to dollar in 1991 to N17.2 to dollar in 1992, a significant 73.7 per cent change. Thereafter, a gradual slide ensued, attaining triple digits in year 2000.
It said though, the local currency was considerably stable between 2000 and 2003, below N120 to a dollar, the recent adverse global capital flows among other factors has culminated in the current all time low of N164 to a dollar rate at the interbank market.
Afrinvest listed potential strategies for more effective exchange rate management to include the incorporation of a long term diversified strategy in fiscal policy which would help cushion shocks in various segments of the economy.
It called for diversification of the economy, adding that the current over reliance on oil receipts which constitute about 96.8 per cent of the country’s total exports by the government, poses a huge threat to the stability of the economy.
It said Nigeria’s dependence on crude oil, 70 per cent of total forex earnings, makes economic growth susceptible to oil price shocks. “A decline in crude oil price therefore leads to a corresponding decline in oil receipts; which forestalls the accumulation of external reserves, creating a negative signaling effect that leads to capital flight, thus depreciating the naira,” it said.
The research firm said it has been able to establish a strong positive correlation between the exchange rate and crude oil price in Nigeria. “Based on our model, when oil price declines by $1 per barrel, the naira depreciates by about 10 cents. Assuming oil price reduces to $100 per barrel from the current $117.80 price, we should expect the naira to depreciate by N11.53 to N173.33 to a dollar,” it said.
