With the continuous slide of the naira in the parallel market, PAUL OGBUOKIRI examines the efforts of the Central Bank Governor, Godwin Emefiele, to save the naira from crisis
Last month, the Central Bank of Nigeria unveiled another set of administrative measures that sought to curb dollar demand by stopping Nigerians from using the interbank foreign exchange market to access dollars for 40 categories of goods, ranging from private jets to rice, Eurobonds and foreign shares. The new rules however led to increased currency pressure at the parallel market, where the naira tested new all time lows.
The naira was quoted at a record low of N235 to the dollar on the parallel market on Thursday, down N1.50 on the day, as dollar shortages persisted, one trader said. Since the measures, the naira has weakened steadily on the black market.
Analysts say the measures risked diverting dollar demand to the black market, worsening investor perceptions about policy in Africa’s biggest economy and delaying a decision to devalue the naira to fully reflect weak prices for Nigeria’s oil exports.
President of Nigeria’s Bureau de Change association, Mallam Aminu Gwadabe told Sunday Telegraph that people were buying dollars on the parallel market to protect themselves against further naira weakness. On the interbank market, the naira traded at N199.45 at 1210 GMT on Thursday, near central bank’s pegged rate of N196.95.
Investors questioned how long the bank’s rate could hold there, when the currency was trading further and further away on the parallel market. But the central bank in a reaction on Thursday said it would not be focusing on the thinly- traded parallel market when determining the exchange rate, despite the naira hitting record lows on the unofficial market since last week. “There is need to deemphasize the parallel market. How can less that one percent be determinant of the rate?
Most of those going that way are those that don’t want to be documented,” central bank spokesman Ibrahim Muazu said. The central bank, worried about rising inflation, has said it is in no mood to devalue the naira again, after it tightened access to hard currency for the import of a wide range of goods.
Muazu said the official interbank market had the capacity to handle legitimate dollar transactions but that people preferred to use the unofficial parallel market for undocumented transactions.
The central bank has spent around $5 billion since January defending the naira, hit by last year’s plunge in oil prices. Executive Treasury, UBN, Femi Olaloku, at a recent conference said, “There is very little the CBN governor can do in isolation and must partner other arms of government to avoid a run-away value of the naira.”
It is against this backdrop that the CEO of First Bank of Nigeria, Bisi Onasanya, said last month that Nigeria needs to let the naira devalue as the restrictions being put in place by the CBN are starting to harm growth in the economy.
He made the assertion in an in an interview with Bloomberg. This is coming as the economy is grappling with a commodity price downturn, the prospects of higher US interest rates, slower Chinese growth and power shortages crimping growth. To reverse the dangerous trend of the naira, CEO of Financial Derivatives Limited, Mr. Bismark Rewane, said oil subsidy should be removed immediately. “This would reduce the import bill by 15-20 per cent of bogus demand, putting the naira in the real equilibrium exchange rate path,” Rewane said in a July 1 presentation.
“If subsidies are removed, the ease in currency pressure will impact positively on reserves.” The CBN has hemorrhaged reserves as it tries in vain to defend the naira amid a 40 per cent slump in oil prices in the past year.
The bank’s dollar reserves declined 15.3 per cent to $29.01 billion in June, from $34.28 billion in January 2015. Emefiele reiterated on Wednesday that foreign exchange controls were helping to stabilise the naira and replenish reserves. “These policies have led to a significant stabilisation in the exchange rate and an improvement in market sentiments,” Emefiele said in a speech to Nigeria’s Senate.
The measures, coupled with efforts by the five-week old administration of President Muhammadu Buhari to cut wasted spending “have seen our foreign exchange reserves begin a gradual recovery,” he said.
The central bank started restricting currency trading in December in a bid to stem the fall of the naira as the price of oil, Nigeria’s main export and source of two-thirds of government revenue, plunged. Last month, the central bank banned importers of about 40 items including toothpicks, private jets and wheelbarrows from using official foreignexchange markets.
Emefiele said Nigeria’s foreign-exchange reserves have risen to $31.9 billion on Tuesday, more than the figure of $29.6 billion from the central bank’s data for the same day. There a worries that the discrepancy may not be a mere coincidence. Reserves fell 23 per cent to $29 billion in the year to the end of June. He further said in the speech that CBN has zero tolerance for speculators, adding, “Nigeria’s foreign reserves remain our common wealth and we must all strive to work together to protect it and prevent speculators and rent seekers from plundering it.”
He said the curbs on importers were necessary to boost Nigerian manufacturing. “At the heart of the issues that currently confront our nation is the need for us to diversify the structure of our economy from being import dependent to being an economy that produces what she consumes,” he said. He restated the commitment of CBN to defend the Naira and its exchange rate in line with its core mandate and responsibilities. FBN Capital analysts led by Gregory Kronsten said in a July 03 note, that “the current measures are not working.”
They said that an influx of dollars through foreign currency borrowing could assist the CBN by improving the supply side. Nigeria had plans to tap the Eurobond markets this year, which has yet to proceed due to the absence of a finance minister.
The naira has lost some 18 per cent of its value in the past year is falling, mostly because Nigeria gets 95 per cent of its dollar earnings and 70 per cent of the Federal budget from the sale of one commodity, oil. Efforts to diversify the country’s earnings away from oil, which include boosting nonoil taxes have yet to take off, as inertia remains on the fiscal side.
Non-oil taxes collected by the federal government were worse than Emerging Market peers and equivalent to only 3.9 per cent of GDP or N3.5 trillion in the 12 months to April 2015, according to data from FBN Capital. They further said that plugging fiscal leakages in national oil company, NNPC, and other government agencies could also aid the CBN in building up its reserves. Adding, “Marked progress in this area would help to allay investor concerns over delays in appointments.”
Assessing the economy since the devaluation of the Naira, he said the outlook remained positive, while the market would continue to be monitored to ensure that all economic activities were adequately supported. On the widening gap between the official retail Dutch auction system, RDAS and the parallel market, Emefiele said the CBN was doing its best to bridge the gap by intervening in the market.
Allowing the gap, he said, would create opportunities that could be exploited by elements determined to cause a situation where the exchange rate would spiral out of control.
On the recent announcement by JP Morgan that it might remove Nigeria from the emerging market indices on the ground that the country’s foreign exchange and the local bond market were not liquid enough, Emefiele told journalists at the end of the Bankers Monetary Policy Committee meeting in Abuja, penultimate week that there is no cause for alarm as the central bank is committed to ensuring that Nigerian remains on the index.
He said the CBN would do everything within its mandate and capacity to keep Nigeria on the index to avoid the negative repercussions of placing Nigeria on a negative watch for the next three to five months.
“We are committed to remaining on the index,” Emefiele said. “We will do everything to remain on the index. We understand the enormity of the negative impact of being removed from the index.
When the issue was first reported, the CBN boss said the bank had disagreed, saying reducing the country’s open market position from one to zero did not mean there were no trading activities.
“If at any time it is discovered that the market is unable to absorb or provide the needed liquidity, the CBN would intervene in the market to provide the liquid needed for legitimate transactions to continue.”
He assured that the CBN would engage JP Morgan with the numbers to prove the level of the country’s liquidity, adding that he important issue remained defence of the external reserve and exchange rate policy.
No comments:
Post a Comment