Tag: volatility

The naira is under pressure due to the inflow of ‘hot money’ or speculative capital into the economy. The demand for dollar, which reduced a few weeks ago, after some policy shifts at the Central Bank of Nigeria (CBN), has risen to new heights. COLLINS NWEZE writes that rising inflation and continued drop in oil prices are compounding an already dangerous trend.

Though the naira closed at N197 to the dollar at the interbank on Monday, last week, it still exchanged at N218 at the parallel market, from N210, by Friday.

The sudden slide in its fortune has been linked to increased hot money in circulation and rising demand for dollars.

Hot money is the flow of funds (or capital) from one country to another, to earn a short-term profit on interest rate differences and/or anticipated exchange rate shifts).

The speculative capital flows are called “hot money” because they can move very fast in and out of markets, potentially leading to instability.

The Nation investigations showed that the demand for dollar is very high as buyers are willing to pick it at any rate. This has been worsened by rising demand by importers who cannot access the greenback from the official forex window.

With some policy shifts at the Central Bank of Nigeria (CBN), especially its forex restriction on 41 items, and gradual rebound in oil prices, the naira found its feet around N197 to dollar but inflation has risen from eight per cent in December to 9.2 per cent in July.

At its weakest, the naira was quoted at a record low of N235.60 to the dollar, a decline of 30 per cent since November. The naira also dropped to N220 at the parallel market before the CBN closed the Retail Dutch Auction System (RDAS) in February. It trades at N210 against the dollar at the parallel market.

Also, the foreign exchange reserves fell 10.04 per cent to $28.87 billion by March 4, but now stands at $30.5 billion. 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 to dollar at the interbank, 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.

Though it was unclear what stabilised the naira before the volatility, interventions from the International Oil Companies (IOCs) cannot also be ruled out.

On forex restrictions’policy of the CBN, former Executive Director, Keystone Bank, Richard Obire, said the policy is expected to encourage importers to look inwards and begin local production as the prices of the affected items will shoot up in the market because of high cost of buying forex from the black market.

He said in the long run, the benefits of the CBN’s decision, would outweigh whatever temporary pains it may have at the moment. “Those who decided to produce those goods locally and export them, will earn foreign exchange instead of depleting the reserves. In the short-to-medium terms, it will be painful but subsequently, it will improve the overall economy,” he said.

He said even the International Monetary Fund (IMF) believes that the CBN should protect the reserves because of the huge benefits of such decisions on the naira. “If the CBN keeps funding these items, the demand for the dollar will rise and this will affect its push for infrastructural development needed to boost the real sector,” he said.

He said the policy could be used to achieve developmental objective, adding that using the available capacity to produce locally, will reduce overall forex demand and when the local production is enhanced, more people will find jobs within the economy.

Former President, Chartered Institute of Bankers of Nigeria (CIBN), Mazi Okechukwu Unegbu, said the policy was meant to fix the battered foreign reserves. He, however, insisted that the some items in the list, have no business being there because they are raw materials. “I have nothing against the policy, but the CBN must be cautious not to drive manufacturers to the parallel market. I expect the regulator to be one step ahead of the stakeholders,” he said.

“The CBN should always consider the unintended consequences of its actions and must set a band which the naira must not exceed.”

Unegbu said it is not right to formulate policies simply to attract foreign investors, because if the investment climate is conducive, they will come without being persuaded.

The Executive Director, Treasury and International Banking, UBA Plc, Femi Olaloku, called on the government to diversify the productive bases and forex earnings of the economy.

This, he said, would enable the economy overcome the challenges brought about by dwindling revenues from crude oil sales. “Dwindling oil prices around the globe poses serious challenges to a developing economy like Nigeria, hence the need for government to also consider various diversification options,” he said.

 

More stakeholders react

President, Association of Bureau De Change of Nigeria (ABCON), Alhaji Musa Gwadabe, said some of the steps taken by the CBN have helped the market to witness the absence of spurious demand and illegitimate transactions.

Sub-Saharan Africa Economist at Renaissance Capital and co-Author of the Fastest Billion Yvonne Mhango said the CBN has shown commitment to dealing with dwindling fortune of the naira.

“While Nigeria cannot do much to influence the oil price, the combination of measures sends a powerful signal to all stakeholders on the CBN’s intent to do what it can to preserve macroeconomic stability,” she said.

Analyst at Standard Chartered Bank, Razia Khan, said the CBN has set clear cut objectives 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,” she said.

She advised the government to improve on infrastructure, noting that such action would make Nigeria’s investment climate more attractive for foreign investors.

 

New measures

The CBN has reacted by fixing the rate at which banks can buy dollars from 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 apex bank has directed that all importations involving electronics, finished products, information technology, generators, telecommunication equipment, and invisible transactions would 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, telecomms equipment, and invisible transactions importations shall, henceforth, be limited to the interbank market only.

“We’re seeing more foreign-exchange flexibility. Perhaps, they do not want to burn FX reserves unnecessarily. It’s a risky strategy though as the market will now look for the topside of dollar-naira and also because the lower rates will reduce the incentive to hold naira fixed-income assets.”

 

BDCs policy

Last June 23, the CBN, among others, raised the minimum capital requirement of BDCs to N35 million from N10 million. It raised the mandatory caution deposit to N35 million from $10,000.

Again, on July 7, the apex bank extended the deadline from July 15 to July 31, in response to appeals and intervention of the 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  capital market is in a shambles. The fall in the price of oil has major consequences on government revenue, aggregate output, capital formation investment, employment, trade and fiscal balance.

The 2008 global financial meltdown also contributed to naira’s freefall.  Chief Executive Officer, Financial Derivatives Bismarck Rewane, said Nigeria was unprepared for the shock. “The economy believed to be one of the most resilient in the world was caught unawares by the global crisis,” he added.

Analysts said a gradual appreciation of the currency would 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.

 

Inflation statistics

The National Bureau of Statistics released the Consumer Price Index for last July, stating that the nation’s inflation rate had remained unchanged at 9.2 per cent. The actual CPI released by the bureau came against experts’ forecast, which had predicted that the rate could increase to 9.4 per cent.

In the CPI report, which was made available to our correspondent, the bureau said the 9.2 per cent figure was the same rate at which the index grew in June.

The report said: “In July, the CPI, which measures inflation, rose by 9.2 per cent (yearly), unchanged from the rate recorded in June.

“The headline index has held at the same rate for the second consecutive month as a result of muted rises in the food and non-alcoholic beverages, housing, water, electricity, gas and fuel, among others.”

Monthly, the report said the pace of the increase in the headline index eased for the second consecutive month, increasing by 0.7 per cent in July, from 0.9 per cent recorded in June.

It stated that the urban index increased by 9.2 per cent yearly, also relatively unchanged from the rate recorded in June, while the rural index increased marginally by 9.2 per cent, from 9.1 per cent in June.

On a monthly, both the urban and rural indices increased by 0.7 per cent, lower from 0.9 per cent recoded in June.