CBN Battles Currency Speculators

Currency Naira

Central Bank of Nigeria’s latest efforts to clamp down on currency speculators and traffickers with a view to strengthening the foreign exchange rate is a step in the right direction.

The Central Bank of Nigeria (CBN) recently applied policy actions on the foreign exchange market that have unnerved speculators and improved the value of the naira. The actions, actually, engineered a sudden appreciation of the naira exchange rate against the dollar.

The new FX announced by the central bank, which clearly caught currency speculators and traffickers off guard, has resulted in a significant appreciation in the value of the naira measured against the US dollar.

In fact, the naira exchange rate, which depreciated by 76 per cent on the parallel market in 2016 due to scarcity of the greenback as well as pressure from importers and foreign investors due to capital repatriation, had also dipped by 10 per cent on the parallel market in the first seven weeks of 2017, before the new FX actions were announced. The naira had shed 46.5 per cent and 66 per cent in the interbank and parallel markets respectively between June 2014 and January 2017.

But following the measures announced by the CBN, the nation’s currency recorded a 19 per cent appreciation on the parallel market, from an all-time low of N525/$ in February to about N425/$ last week.

Several parallel market operators and speculators, who had been stockpiling dollars for months have been lamenting that the CBN’s intervention was forcing them to offload their dollars at a loss. But as they bemoaned their losses, market analysts cautioned that they were likely to incur more losses, as the CBN, in keeping with its determination to increase liquidity in the FX market has so far pumped a total of $772 million into market.

Most economists and analysts still expect the naira would further appreciate in the coming days following the sale of about $20 million to Bureau De Change (BDC) operators by Travelex this week.

The CBN had, in explaining the objective of its actions, among other things, said it had resolved to ease the burden of travellers and ensure that transactions are settled at much more competitive exchange rates and had directed all banks to open FX retail outlets at major airports as soon as logistics permit.

Furthermore, as part of efforts to further increase the availability of FX to all end-users, the CBN said it decided to significantly reduce the tenor of its forward sales from the current maximum cycle of 180 days, to no more than 60 days from the date of transaction.

But while some Nigerians and investors have continued to commend the central bank over its action to halt the speculative attack on the naira, some have continued to argue that the seeming currency war victory might be a flash in the pan unless the central bank allows the market to fully determine the exchange rate.

To Float or Not to Float

While the debate on whether to freely float the naira or not rages on, the Head of Banking and Finance, Nasarawa State University, Dr. Uche Uwaleke, opined that Nigeria needed a minimum of $32 billion in reserves to be comfortable enough for seven months of imports before it could even decide to float the currency. Faulting the call for the CBN to freely float the country’s currency, Uwaleke said the supply of forex was yet to be enough to leave the currency to market forces.

He charged the monetary authorities not to succumb to pressure, saying Egypt, which succumbed to pressure to freely-float its currency, has seen its currency depreciate more than envisaged.

“If we don’t have this $32 billion, we shouldn’t be thinking of floating the currency. Nigeria needs a minimum of $32 billion to be regarded as comfortable and that is enough to finance seven months of imports. So if we don’t have this $32 billion, we shouldn’t be thinking of floating the currency,” the don said.

Uwaleke added: “Egypt was advised not to float the currency until they got to $25 billion reserve but because Egypt was pressured and in a hurry to get $12 billion International Monetary Fund loan, they did the currency float much earlier and they have now seen the outcome. So when people say Nigeria should float, why we don’t look at what happened elsewhere to learn?

“In order to boost the economy, the current demand management, which involves forex access restrictions of items that can be produced locally, should be contained. I am not saying that the policy should be kept forever, but we should sustain it until we get out of recession. If our reserves get to a comfort zone of about $32 billion, then we can begin to think of how to relax the policy,” he added.

Uwaleke urged the CBN, through its development finance function, to identify certain goods that can be produced locally and provide incentives for SMEs to be able to produce locally.

But the Chief Economist, Africa, Standard Chartered Bank, Razia Khan, said the changes observed in the FX market, essentially increasing FX supply to the interbank market in Nigeria, was a positive step in the right direction.

“However for the impact on spreads with the parallel market to be more long-lasting, Nigeria needs to go a step further, in allowing for greater price determination (that is determination of the FX rate) on the interbank market.

“Until the interbank market is freed to play a greater role in exchange rate determination, there is no guarantee that increased FX supply will be sustainable.

“There will be no real recovery in the Nigerian economy until the FX shortage is resolved – only a technical recovery off a very weak base,” Khan added.

Also, analysts at Renaissance Capital held the view that although the measures by the CBN were a move in the right direction, “but as we expected they fell short of a full liberalisation.”

“The CBN plans to use the $5 billion in FX reserves it has built up (via a deliberate policy of building up reserves since November) to increase liquidity in the interbank market and make FX available for retail transactions (including travel allowances and school and medical fees). This will affect about 20 per cent of FX transactions.

“The CBN has introduced FX flexibility with respect to retail transactions by allowing them to take place at an FX rate not exceeding 20 per cent above the interbank FX rate. We take this to mean that retail transactions can be settled at any rate in the N315-380/$ range.

While we think this will provide much-needed short-term FX liquidity relief for the banks, it does not necessarily address all the current issues.

“FX policy remains interventionist, with the CBN still providing guidance on the FX rate. Furthermore, the CBN will remain the biggest supplier of liquidity on the interbank market.

“There was no mention of restoring an FX market where banks trade on a two-way quoting basis, whereby banks are free to buy from all FX sellers and sell to their customers at market rates for price discovery,” Renaissance Capital added.

However, the Chief Executive Officer of Afrinvest West Africa Limited, Mr. Ike Chioke, recently said Nigeria’s present economic environment did not support a fully flexible exchange rate regime.

He also said it would lead to massive capital outflows, thereby leading to pressure on the FX market.

Chioke pointed out that for a fully flexible exchange rate regime to be effective in the country, there was need for large-scale reforms in sectors such as the oil and gas, power, mining, as well as significant improvement in the level of governance in the country.

“Actually, if you look at what the CBN has tried to do in the exchange rate environment, I believe they have tried given all the challenges they are faced with. If they were to go to a fully flexible exchange rate in the Nigerian economy today, I would probably be against that.

“You know why, it would be trying to solve the problem on the fringes. When you do that, all the capital would just fly out.

“To adopt a flexible exchange rate, you need to impose some massive reforms in some of the key sectors that would help to attract dollars. You can’t manage in one dimension. You have to remember that your problems are multi-dimensional.

“So, as you are trying to fix this one, remember that the other one might be opening up. So, a reform that focuses on large-scale reforms is what the country needs before we can allow the exchange rate to float.

“Once upon a time, we were actually close to that. There was a time when between Soludo and Sanusi, we could have done that. We were getting to that sweet spot. The naira was even appreciating, but we lost that opportunity,” he said.

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