The naira on Wednesday exchanged at N238 to one dollar after exchanging at N246 a week earlier, indicating that the currency is heading south since the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) announced its policy decisions at the end of its two-day meeting in Abuja, last week.
But experts say it is not yet Uhuru for the naira, as the precarious situation of the economy will continue to pressurise the currency until it gets a lease of life through appropriate fiscal intervention.
They also said in separate interviews with Sunday Telegraph that the wide gap between the interbank rate and the parallel market rate still makes the naira attractive for speculative trading. Investment Banking research firm, Renaissance Capital, expects that the naira will to face further pressure, “thus we believe…..10 per cent currency devaluation for the currency is still necessary,” it said in a report. “Even though the CBN is committed to defending the naira, the currency pressures facing Nigeria are becoming more intense.
The spread between the interbank rate and the parallel market creates an arbitrage corridor for speculators, and is now a round tripper’s paradise. Another issue that is of concern is the consistent decline in oil receipts as a result of falling oil prices, when the sanctions on Iran are finally removed,” it stated.
The firm said in a recent report that in totality, the Nigerian economy is not very active because it is commodity-based. “The economy lacks diversification and is relatively weak when compared to industrialised economies of the West and East.
The point here is that the source of generating foreign exchange to Nigeria is quite limited for the major source of foreign exchange for Nigeria comes from oil. Therefore, Nigeria lacks the adequate zest and resources to constantly fend off speculators and buy back the naira in the hands of foreign currency traders,” it said.
It added that Nigeria needs an export-driven economy that will enable her to accumulate large and intimating foreign reserves. Meanwhile, Bloomberg Africa in a recent analysis stated that the naira cannot escape further devaluation, because it is an import-based economy. It said that the situation had been hampering a string rebound of the naira because the importers are busy sending foreign exchange overseas.
“In the short run, Nigeria’s option is limited. Nigeria can dip her hands into her foreign reserves and ease the scarcity of dollars by liquefying her capital market, thus making the naira stronger. But once Nigeria does that she will increase the internal demand for dollars and other major currencies,” it said.
CBN announced a benchmark interest rate on hold at 13 per cent after the MPC meeting, saying concerns about rising inflation and expected normalisation of U.S. interest rates meant monetary policy had to remain tight.
According to the Governor of the Central Bank of Nigeria, Mr. Godwin Emefiele, the bank’s monetary policy committee voted 8-4 in favour of keeping the rate at its current level, one of the world’s highest benchmark borrowing rates. Its last move was in November. Emefiele also said the naira, which has lost around 15 per cent against the dollar over the last year, with an official devaluation in November and a de facto one in February, was “appropriately priced” at its current level of 198.
The central bank has restricted currency trading since December in a bid to stem the fall of the naira. Last month, the regulator banned importers of about 40 items including toothpicks, private jets and wheelbarrows from using official foreign-exchange markets. Emefiele rejected the idea of loosening the FX curbs, saying the central bank could not adopt an “indeterminate policy” of currency depreciation.
The weak currency has put pressure on inflation which at 9.2 per cent is above the upper limit of the central bank’s target range. However, he said he believes this trend in price rises is transient, noting that “pressure on food prices is expected to gradually wane as the planting season gives way to harvest in the month ahead.”
He also highlighted the impact of fuel shortages after a strike by importers earlier this year. This strike disrupted aviation, banking and mobile phone networks because the private generators that produce most of Nigeria’s electricity ran out of gasoline.
“Any resolution of fuel scarcity would dampen transportation costs and improve food distribution, while improvements in electricity supply would steady output at lower cost,” he said. Razia Khan, head of Africa research for Standard Chartered bank, said Nigeria was “in a difficult position.” “Growth is slowing, but with inflation set to rise, it is not obvious that policy can be loosened very substantially,” she said.
The MPC also kept the cash reserve requirement on public and private sector deposits unchanged at 31 per cent. Emefiele further said, “Monetary policy alone remains handicapped and would require urgent complementary fiscal policies to define the path of growth.”
President Muhammadu Buhari has yet to appoint a finance minister or clearly delineate the details of his economic plans as he’s waiting until September to appoint a cabinet. “The central bank is still looking for policy direction before doing anything bold,” Khan told Bloomberg. “Everything is on hold.”
While the measures stabilised the naira at an average of 198.96 per dollar since the start of March on the interbank market, they have left it overvalued and caused investors including BlackRock Inc. and Aberdeen Asset Management Plc to shun local bonds and stocks until there’s devaluation. But reacting to the development, CBN’s Director of Corporate Communications, Mr. Ibrahim Muazu, said there is no need for panic at the development, adding that it could be just a temporal reaction to the policy change.
Analysts at Financial Derivatives Company Limited anticipate that CBN will increase the use of administrative measures in its quest to protect the naira following the massive pressure faced by the local currency in the parallel market. These administrative tools are the cash reserve ratio (CRR) and Open Market Operations (OMO).
The report also noted that the aftershock of the CBN’s restriction of importers’ access to foreign exchange at the interbank and bureaux de change forex markets would be felt in the coming months. While defending the recent foreign exchange measures taken by the apex bank to shore up the dwindling foreign reserves, Muazu said the apex bank would not be pressured into the further devaluation of the local currency which he said was the intent of some sections of the international communities.
He stated the parallel market cannot trigger any economic crisis since all major foreign exchange demands for eligible imports go through the official exchange market which has not only remained stable but has been fully supplied by the apex bank so far. Bureau de Change operators said the huge demand for foreign exchange began to inundate them as well as the black market as a result of the CBN’s shut-off of 41 items from the official market three weeks ago.
But Discount Exchange Bureau De Change, a Qustill Managers Limited, Sadiq Usman, said on Wednesday that demand have been low since Monday, consequent upon which the naira gained over N7 against the dollar in the parallel market on Wednesday.
Managing Director of Threshold of Trust Bureau De Change, Alhaji Idris Mohammed, said on Wednesday that there had been a lull in demand since the beginning of the week. He noted, however, that the amicable resolution of the National Assembly crisis is bringing back confidence in the economy. “I expect the naira to continue to appreciate in value till the end of the week,” he said.
Muazu had said CBN’s discovered that the supply/demand gap experienced in the parallel market was as a result of supply shortages in that segment. This followed the plugging of loopholes from the official markets that had hitherto leaked into parallel market through round tripping. He also said other economic crimes such as money laundering were major drivers of the current situation in the parallel market. President of BDC Operators of Nigeria, Aminu Gwadabe, had given reasons for the decline in the value of naira in the parallel market to include “over regulation of the bureau de change and financial markets, increased naira liquidity chasing fewer dollars, intensified hoarding and speculative activities, inability of banks to meet legible and legitimate demands and tightening policies of CBN.”
He confirmed that the naira recorded some stability recently, saying however that the appreciation recorded in the value of the currency arose from a lull in the economy. Managing Director, Integrated Promotions Nigeria, Mr. Chinedu Ephraim, said the instability in the exchange rate is running him out of business. He stressed that he had found it difficult restocking his shop as the falling exchange rate erodes whatever margin made on the sale of wares.
He expressed happiness that the exchange has stabilised, saying it should be sustainable so that traders can order for more goods. Managing Director, Zindex Electronics, Alaba International Market, Lagos, Mr. Chizoba Modebe, said he had not placed orders for more goods since December. He said he decided to wait for when the exchange rate of the naira will stabilise. “My warehouse is still filled with goods. In fact, business has been bad since the beginning of this year. My goods arrived since November.
My partners are worried but I cannot order for goods for Christmas sales until this exchange issue is resolved,” he said. Director-General, LCCI, Mr. Muda Yusuf, explained that consumer goods firms have been hard hit because of their exposure to the forex market, among other things. “The outlook is not positive for many of the players in the economy. The challenges are going to intensify because the CBN apparently has not taken any step to address the major concerns.
There are still a lot of issues relating to confidence in the management of the foreign exchange market. There is, in fact, a lot of confusion,” he said. Yusuf explained that the challenges the companies were facing with regards to access to certain critical inputs would remain as well. “They may even worsen, because you can assume that some of them have not run out of stock (what they had before the ban) and they will run out of stock and will need to replenish,” he said.
Also speaking on the development, the immediate past President, Chartered Institute of Stockbrokers, Mr. Ariyo Olushekun, said the high exchange rate was also having an impact on the value of the stocks of the consumer goods companies and the stock market, as it meant there would be lower participation by foreign investors.
“If they (foreign investors) bring in funds at N200 to the dollar, for instance, by the time they make 25 per cent gain and the exchange rate has moved to N250/dollar, that means they haven’t made any return,” he explained.
Olushekun said the foreign exchange rate was also affecting the overhead costs of many of the companies, because many of the critical inputs for production were being imported. “This means that their costs are rising and where they are not able to pass the costs totally to the consumers, then their bottomline starts shrinking.
That is why you are seeing consumer goods companies posting lower results,” he added. Olushekun also questioned the efforts made by the CBN to manage the naira so far. He explained that while the intentions of the CBN were good, there was the need for a more holistic view in managing the exchange rate crisis.
For instance, he said that while some of the items whose importers were denied access to forex were justified, some others ought not to be on the list. “I think the CBN needs to look at its strategy. For instance, between September and now, the CBN has come out with about 14 or 15 policy pronouncements on foreign exchange management. This doesn’t show a good sign,” he added.
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