$530m injection: Forex intervention that relieved naira

The sustained appreciation of Nigeria’s national currency since last week’s intervention by the Central Bank of Nigeria (CBN) has again rekindled the hope of most Nigerians in the ability of the apex regulator to manage the nation’s foreign exchange market against the vicissitudes of the global economy caused by collapse of commodity prices. Before that intervention, most book makers had predicted the CBN was merely prodding the naira onward the Zimbabwean experiment where its national currency became so worthless that one needed a lorry load of currencies to buy a loaf of bread. 

But from last week when the first tranche of $370 million was sold at a special intervention, there has been no stopping the naira. On Tuesday, for instance, the  naira strengthened in value in the parallel market as it was sold for N425 to a dollar.

Even yesterday, it was stable at the parallel market, exchanging at N450 to a dollar.

Similarly, other currencies including the Pound Sterling and the Euro crashed further at the parallel market because of the naira exchanging for N535 and N460 respectively.

At the Bureau De Change (BDC) window, it was sold at N399 to a dollar, while the Pound Sterling and the Euro closed at N610 and N500, respectively.

At the interbank window, the currency closed at N305.25 to a dollar. This whole development leaves one with the firm conviction that naira’s situation is not totally irredeemable afterall.

This was even as traders at the various market segments called on the CBN to sustain the gains of the new policy by boosting liquidity at all segiments.

There is every indication that the problem with naira can only be linked to the crash in Nigeria’s earning from crude oil which lost more than half of its peak price in 2014.

In addition to this, many are of the opinion that the exit of portfolio investors from Nigerian money and capital market also escalated the foreign currency drought.

However, in its reaction to Naira’s new found strength, Nigeria’s  Organised Private Sector (OPS)  hailed the policy, saying it will help the productive sector of the economy.

The Manufacturers Association of Nigeria (MAN), for instance,  said that it is the best news that has come to the sector in years, in view of the hardship the high foreign exchange has brought upon the sector in the past two years.

The MAN President, Frank Jacobs, who spoke with Daily Sun in a telephone interview said with the firming of the naira against the dollar, manufacturers would be able to import their raw materials cheaper.

“If we can get our raw materials cheaper, it means the cost of production can come down, the prices of commodities would also come down and this would make our products competitive,” he said.

Jacobs also noted that it would make more companies that are already out of business due to problem of acquiring new machines, to get the machines at a cheaper cost.

“It is indeed the best news for our sector. Our members now buy forex at N430 and it’s still going down, and this means cost of acquiring new machines will also go down compared to when we sourced forex at N530,” he said.

The MAN President, however, said that the sustainability of the present process is the only issue that worries the manufacturers despite assurances from the CBN.

But he maintained that if the current scenario persists, where the manufacturers get forex cheaper, then it would not be long before the nation can get out of the current economic mess.

Though the Nigeria Employers Consultative Association (NECA) commended the CBN for what it considered its recent winning formula, it, however, expressed some doubt about the ability of the apex bank to sustain the tempo of supply to the market.

The Director General of NECA, Olusegun Oshinowo, said the present move was just an intervention, whereas the demand for forex in the overall national economy goes beyond meeting the Business Travelling Allowance (BTA), Personal Travelling Allowance (PTA), medical bills and school fees.

“Nigeria still imports petroleum products, which takes the chunk of our forex and which cannot be sourced in the  parallel market. So, there is need for us to look beyond the short term and see if the CBN can meet the forex need of the economy,” he stated.

According to him, there is still dearth of forex in relation to providing adequate forex for the economy, hence the sustainability in the medium term beyond the present short term intervention.

“There is a big gap between forex need of the economy and what CBN can supply. What they’ve been able to do is to meet the demand in the short term, but the question is whether CBN can meet the forex demand of the economy in the medium term,” he said.

Meanwhile, Prof. Sheriffdeen Tella, a Senior Economist at the Olabisi Onabanjo University, Ago-Iwoye, Ogun, told NAN yesterday that the new forex policy could be sustained to the extent that external reserves could sustain it.

Tella frowned at the lifespan of the policy, adding that every good policy was characterised by its ability to be sustained for a longer period.

He urged Federal Government to dialogue with the monetary policy formulators to ensure a reduction in the nation’s benchmark interest rate.

He argued that lowering the lending rate would encourage small businesses in need of expansion to borrow money at a low cost, thereby increasing the capacity of the nation to earn foreign exchange.

Already, sustaining the gains of the policy became a subject of debate among scholars and stakeholders in the foreign exchange market.

For instance, since last week when the apex bank intervened with about N370million in the retail end of the foreign exchange market, there has been no stopping the naira in the race to cover lost grounds.

Despite hitting a record high of N530 to the dollar, and with  many speculators hoping  it would hit N600 before this weekend, the policy has given Nigerians some sort of surprise, as the currency rebound dramatic to close at between N415 and N450 to a dollar on the last working day of February, 2017 to the amazement of speculators in the market.

A recent survey of rates at various bureau de change (BDC) market across the country revealed that most operators bought at the rate of N415 and sold at N425, but closed the day at N450 per dollar.

Some  BDC operators bought the Pound Sterling at N500 and sold at N515, while the Euro was bought for N420 and sold for N425.

At the inter-bank rate, the dollar exchanged for N331.6, euro 335.75, while the pound exchanged for N394.25.

Lamenting the shock suffered in the markets in recent times, some of the BDC operators attributed the surge in Naira value against other convertible currencies to the provision of $530 million sold by the CBN to the 23 commercial banks.

“When the cost of dollar is high, we make little profit; but when it is low, we make more profit because we buy more to sell.” Said one Bureau de change operator who spoke on the emerging trends in the forex market.

He, however, said that end users were still facing challenge in accessing forex from the commercial banks because of the stringent conditions demanded by them.

“If someone applies for forex from banks, it takes time and the process is frustrating; sometimes, they make additional demands before they can sell to you,” he said.

Experts have, however, expressed concern about the sustainability of the measures by the apex bank in the face of the prevailing multiple exchange rate regime which create ample room for arbitrages.

But speaking at a seminar organised by CBN in Sokoto, an Economist, Uche Uwaleke, admitted that a complete currency float was capable of unifying rates, reducing round tripping and speculative activities in the market.

He, however, said that such a measure could be suicidal for an import-dependent economy that derived much of its forex inflow from a single commodity.

Uwaleke therefore recommended coordinated fiscal policies designed to encourage import substitution and enhance competitiveness of local production to help reverse the downward trend in the value of naira.

“Government should fast track efforts to improve the ease of doing business and the state of infrastructure in order to attract foreign investments to develop multiple streams of earning foreign exchange.

“It is only when the supply of forex is guaranteed from diversified sources that the issue of market-determined value of the naira can be tabled for consideration,” Uwalake said.

But not withstanding the apprehensions being expressed in some quarters, most Nigerians believe that the worst is now over for the nation’s foreign exchange market with the stability CBN’s injection has brought into to stem the soaring demand by end users.

For one, it has beaten speculators and currency hoarders to their game as many of them have lost money in the last few days, hence the call for the policy to be sustained by the apex bank.

In one of its major interventions in recent times, the apex bank pumped in about $370.9 million to the market through 23 deposit money banks to ease demand pressure by Nigerians for foreign exchange towards meeting various obligations under visible and invisible needs categories.

It, however, topped it up with another $180 million on Monday, as part of measure to further boost liquidity in the market.

While $100 million was for the wholesale forwards segment, $80 million was for the settlement of dollar demand for school fees, medicals and Personal Travel Allowance (PTA), among others.

Since these injections, the naira has, in the last few days, firmed up against the dollar to close at between N460 per dollar and N480 per dollar from N520 per dollar early last week. But while many have hailed the apex bank’s latest intervention, there are fears in some quarters that CBN might not sustain the tempo and this might send a dangerous signal to the market.

Another challenge also is the sincerity and ability of the commercial banks to transmit the funds to end users who are genuinely in need of it. A situation where the money is recycled for roundtripping or sold above CBN’s approve margins would certainly vitiate the modest gains recorded by this intervention.

Meanwhile a development economist, Mr. Odilim Enwegbara,  said that the measure may not be sustainable as the CBN does not have a steady hold on the dollar. According to him, the apex bank is supposed to participate in the market and not to intervene.

He observed that CBN takes arbitrary measures because there is no board to check its policies. He called for the constitution of the board of the apex bank to oversee some of its activities with respect to the foreign exchange management.

The economy expert also cited a section of the CBN Act 2007 where the governor must appear before the National Assembly at least once a year to present his monetary policy.

“It is not necessary (to intervene) because when you intervene, you distort the market value of the currency. When you flood the market with dollar, what you are doing is that those who have been buying out the market – importers who have been having high rate –will no longer import and they will return to the market. That will increase the demand of the currency (dollar).

“CBN’s natural constituency is the banks. Normally they inform the banks that they will soon intervene. So, the banks will just wait and gather a lot of naira. As soon as they intervene they buy up the money. And of course, they are not buying the money for the real market, they are buying it for importers. These are the people that make serious payment to banks for helping them to get the dollar.”

“We need the National Assembly to intervene because there is a section of CBN Act 2007 that says the CBN governor must appear before the National Assembly at least once a year to present his monetary policy so that the lawmakers will ask questions and get answers from them. So, it is high-time the National Assembly started calling the CBN governor to answer certain questions and scrutinise certain things CBN does.

“It is high-time CBN board was constituted (because the CBN board has not been constituted). It means that nobody is over-sighting what CBN is doing.”

Most of the things CBN is doing today should have been over-sighted by the board. To inject $550.9 million can happen only when you have a steady hold of the dollar. Even if you have it, why not go to the market and pretend that you are selling, like any other person in the market. What you need to be doing is to be buying. People are selling and you are buying. The more you buy, the less naira will be available so that the value will increase. You cannot just announce that you are pumping $550.9 million at a particular rate. Why can’t CBN go to the parallel market? Soon, there will be shortage of the naira if CBN continues to pump dollar.

CBN is supposed to be participating in the market by going to the market and seeing the rate others are buying and selling. As it is buying, there will be shortage of the dollar because when there is a lot of dollar chasing naira, naira will appreciate at that particular moment. CBN is not supposed to intervene but participate in the market,” he stated.