Wednesday, November 2, was a day that Ismail Abdulrasheed, a Lagos-based currency speculator, will not forget in a hurry. It was the day naira crashed to N900/$1 in the parallel market, giving him one of the biggest fortunes since his 40 years in business. The naira big fall followed initial rush that greeted January 31 deadline set by the Central Bank of Nigeria (CBN) for people to deposit old banknotes into their accounts, in line with the currency redesign timelines.

Although that naira quickly recovered to N800/$1 within 48 hours, and gradually steadied at N758/$1 at present, the short period of crash was all that Abdulrasheed needed to cash in. Abdulrasheed, who bought the dollars at N700/$ a month earlier, keeps narrating the breakthrough story to his friends and business associates, explaining how it happened.

“I was preparing for the Suri prayer when I got a WhatsApp message that made me richer. My business partner, Abubakar Idris, had on November 2, 2022, informed me that the naira was exchanging for N900/$ at the parallel market. I hurriedly said my prayer, moved to the vault where I kept $100,000 to confirm it was intact. I then called five of my most trusted aides and gave them $20,000 each to exchange for naira. I made N200 margin on every dollar sold because I bought at N700/$1. That came up to N20 million profit within four hours,” he narrated.

He said the transactions were concluded within four hours because several manufacturers, importers and other end-users of foreign exchange (forex) in desperate need of funds, quickly purchased all he had, and paid immediately.

Abdulrasheed is one of the thousands of currency speculators capitalising on the heightened forex supply shortage, demand pressure and forex rationing by the Central Bank of Nigeria (CBN) to create fear, panic and volatility in the market.

These speculators have also made it difficult for the local currency rates to converge as they kept manipulating the parallel market exchange rates against official rates. They are behind the rising premium between official and parallel market rates which has defied all exchange rates movement rules.

The naira is exchanging at $440/$1 on the I&E forex window – official market, but in the parallel market where a large part of the demand is settled, the local currency is facing the highest level of volatility in its over 50 years’ history where it has met series of devaluations and adjustments based on market realities. It was not only devalued by 60 per cent in the last 18 years but in 2001 alone, its value was slashed 27 per cent and its value has over the years, continued to plummet rapidly.

Naira journey through the years – a continuous slide

The local currency first hit double digits in 1991, moving from N9.9 to N17.2/$ the following year. That constituted a significant 73.7 per cent change. Thereafter, a continuous slide ensued, attaining triple digits in 2000. Although it was considered stable between 2000 and 2003 (below N120/$), the recent adverse global capital flows especially to developing economies and drop in oil prices, among other factors, have culminated in the current low of N758/$1 at the parallel market.

At the official market, the naira exchange rate has been severally adjusted to N305/$, N360/$, N379/$ and now $440/$ in the Investors & Exporters (I & E) Forex window. An economist and Managing Director, Financial Derivatives Company Limited, Bismark Rewane, explained why the naira was on the decline.

“As oil prices dipped, the CBN has prioritised stability of exchange rate in the official market. It has drawn an exclusion list of avoidable imports from being funded in the official market. With the forex demand for the items transferred to the parallel market, rates in that market have soared,” he said.

Member of CBN-led Monetary Policy Committee (MPC), Prof. Adeola Adenikinju, warned that the naira faces immense challenge ahead unless certain conditions were addressed. Adenikinju, a Professor of Research at the Centre for Econometrics and Allied Research, University of Ibadan, said the fall in foreign reserves and deterioration of current account balances were red signals. He further explained that although the foreign exchange rate markets remain relatively stable at official market, the weak performance of the current account balances, fall in foreign reserves and the small margin between oil price and the budget benchmark price for oil, imply that there could be increasing pressure on the naira in the medium term if the existing conditions subsist.

Goldman Sachs recently agreed oil could tumble as low as $30 a barrel, a level that would decimate the already heavily damaged economies of Nigeria, Saudi Arabia and Russia. Trading Desk Manager, AZA, a global forex trading firm, Murega Mungai, said the depreciation of the naira will continue until there are regulatory sanctions against illegal forex dealers, especially exporters who fail to remit export proceeds to government coffers as spelt out in the CBN’s Foreign Exchange Manual.

The manual, which stipulates that exporters repatriate export proceeds to Nigeria to support the naira and boost the economy are usually not followed by the parties concerned. Also, dollar demand pressure has continued to weigh in from importers stocking up for seasonal sales and finding it difficult to source from the official market, they are directing their demand to the parallel market. Shipping and airline companies have also been accused of depriving Nigeria of the much-needed dollar earnings by not remitting export proceeds.

Despite the CBN intervention through weekly dollar sales to banks, the huge demand backlog by manufacturers and foreign investors, estimated at $2.5 billion and over $4 billion unmet demand at the parallel market, still puts pressure and creates a volatile situation in the forex market.

An economist and Managing Partner of B. Adedipe Associates Limited, Abiodun Adedipe said continuing pressure from relentless imports and shrinking capability to pay foreign bills will likely force the CBN to further devalue the naira, but not significant. He said many people are already mopping up dollars as expected devaluation of naira persists, worsening naira exchange rates against other currencies. “We need foreign currencies to pay for imports. Our economy is not anchored around a sector or economic activity. Other economies are centered around export, but Nigeria geared towards imports. We need to explore the African Continental Free Trade Agreement (AfCTA), by looking at African within the content. What do they import, where do they import from, and that will become our own focus for export,” he stated.

Adedipe said five years ago, the Nigerian economy was x-rayed on five accounts of oil dependency, policy inconsistency, leakages, over-dependence on imports and low national productivity. He said these vulnerabilities have remained unchanged till date.

Also, the CBN stoppage of dollar sales to BDCs had pushed manufacturers and foreign exchange end-users to the official market where backlog of unmet foreign exchange demand continued to soar. The BDCs are now sourcing dollars from autonomous sources, usually at higher prices. Market dealers and analysts said these policy shifts could increase hoarding of scarce dollars in the hands of very few forex dealers.

Rewane, said channeling dollars solely to commercial banks will not solve the problem of market volatility. For him, the banks also have challenges with keeping with set forex trading guidelines. “The question that arises is what is the optimal solution? Administrative controls or market pricing? The interim solution of substituting BDCs with banks is hardly going to achieve much. You are virtually handing over the yam barns to goats to secure. In the end, there will be no yams nor goats,” he said.

Experts pointed out that the forex crisis has major dimensions-sharp depreciation in the exchange rate and volatility of the rate and illiquidity in the forex market. Chief Executive Officer, Centre for the Promotion of Private Enterprise, (CPPE), Muda Yusuf, suggested the way out of forex conundrum. He said there was need to allow market-driven forex environment as well as de-emphasise demand management and focus on strategies to stimulate forex inflows. “A market-driven forex framework will restore calmness and stability to the market and also boost forex supply. Although there may be a momentary spike in exchange rate, stability and gradual appreciation of the rate would follow soon after,” Yusuf said.

He lamented that the current approach would continue to deepen distortions in the economy, perpetuate round tripping, fuel speculation, suppress forex supply and boost underground economy. According to him, the second fundamental issue to be dealt with is the structural constraint to productivity, urging policy makers to create an environment that support exports as well as strengthen import substitution capacity.

“In normal circumstances, we have no business spending billions of dollars annually on importation of refined petroleum products, petrochemicals, fertiliser, iron and steel and food. We are sufficiently endowed to be self- sufficient in the production of these products. But for these to happen, there must be significant improvements in productivity and competitiveness. This would require significant investment in infrastructure and right policy choices. We also need to deal firmly and sustainably with the challenges of oil theft and the impunity associated with it,” Yusuf said.

Director General, Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Olusola Obadimu, decried disparity in forex rates, where government’s preferential forex window is not even available to manufacturers with export potential. Deputy President, Lagos Chamber of Commerce & Industry (LCCI), Gabriel Idahosa said halting the depreciation of the naira cannot be a quick fix.

He argued that the causes of the depreciation have built up over several decades starting with the first spike by the 1986 Structural Adjustment Programme (SAP). Idahosa noted that about 30 per cent of Nigeria’s annual import bill is for refined petroleum products. He narrated how 30 years ago, oil companies that wanted to invest in refineries asked for removal of fuel subsidy to enable them produce refined petroleum products locally and sell at prices that cover their costs plus reasonable profit margin.

His words: “If we had consented, by now Nigeria would have become not just self-sufficient but also a major exporter of refined petroleum products. We would be talking of a strong currency comparable to those of Saudi Arabia, United Arab Emirates, Qatar and Kuwait. We also lost a similar opportunity to be a major exporter of rice since about the same thirty years ago when we had a lot of oil money to build very large rice farms and rice mills all over the country,” Idahosa said.

What the CBN is doing

The CBN never stood idly watching the naira slide into oblivion. The regulator took certain stringent measures, including imposing some currency control measures to save the naira. Firstly, it curbed access to the interbank currency market for importers bringing in a variety of goods. To conserve its dollar reserves, the bank said importers could no longer get dollars to buy 43 items, ranging from toothpicks and rice to steel products and private jets.

The Naira-4-Dollar scheme was designed to encourage remittance inflows from the diaspora and entails the giving N5 bonus for every one dollar remitted to serve as an incentive for both senders and recipients of money transfers. It was equally designed to enhance the supply of forex and consequently ease pressure in the forex market. According to the CBN Director, Trade and Exchange Department, Ozoemena Nnaji announced that the Naira-4-Dollar scheme attracted $2.4 billion in diaspora remittances between January and August this year, surpassing the figure reported last year.

CBN Governor, Godwin Emefiele, said the need to support the fundamentals of the Nigerian economy, diversify from dependence on oil inflows, and minimise the debilitating pressures in the forex market that led to the launch of the Race-To-$200 billion (RT200) programme in February 2022. According to him, the initiative, designed to stimulate non-oil exports earnings with a $200 billion foreign exchange income target in three to five years. Emefiele said that in 2022, a total of $4.98 billion has so far been repatriated into the country by non-oil exporters, about 56 per cent up from $3.19 billion repatriated in 2021.

He further said that out of the $4.98 billion, only $1.96 billion qualified for the rebate programme, and only $1.55 billion was sold at the Investors and Exporters (I&E) window or for own use. Emefiele stated: “The CBN has also paid out about N81 billion in rebates to hard working Nigeria exporters. This is a testament to the resolve of the CBN to ensure quick acceleration of the export value chain in the country.”

The implementation of the Dynamic Currency Conversion (DCC) policy, which allows banks to reject payment requests from customers paying business partners abroad with naira debit cards, has also helped to preserve dollar reserves. Banks are now asking such customers paying clients abroad to do so in the currency of the beneficiary’s country, not in naira. For instance, a bank customer paying foreign business partner $5,000 is now required to fund his/her domiciliary account with the money for onward transfer to the customer. This differs from the previous practice where equivalent of the $5,000 was debited on the customer’s naira account.

The way out, by stakeholders

Many stakeholders and in study experts have preferred solutions to the naira crisis and pointed to policy measures that are working against naira stability. For instance, the exchange rate between the naira and dollar at the parallel market depreciated by N258/$1 since the policy implementation in July 2021. The naira was trading around N500/$ on the parallel market in July 2021 but has fallen to N758/$1 at present despite the banks handling the dollars previously sold to BDCs.

Similarly, the exchange rate between the naira and the dollar at the official Investors and Exporters (I&E) window has depreciated to N440/$1 from N410/$1, representing N30/$1 depreciation. There are allegations of foreign exchange hoarding against the banks, with customers claiming that dollars meant for the retail end of the market are not getting to beneficiaries. This practice has worsened dollar scarcity and volatility in the forex market, with foreign investors having a rethink on investing in the economy, fearing they may not be able to repatriate funds at the expiration of their investments.

The International Monetary Fund (IMF) advised the CBN to allow commercial banks determine dollar buy-sale rates to boost foreign capital inflows to the economy. The multilateral institution said a unified and market-clearing exchange rate remains critical to enhancing confidence of foreign investors and attracting more foreign capital to the economy.

The IMF, which made the disclosure in its 2022 Article IV Consultation concluding statement following an official staff visit to Nigeria, insisted that continued forex shortages, a stabilised exchange rate regime, limited debt servicing capacity, and administrative restrictions on current transactions fuel devaluation speculations. “These factors hinder much needed capital inflows, encourage outflows and constrain private sector investment. The mission reiterated its past recommendations to move towards a unified and market-clearing exchange rate by dismantling the various exchange rate windows at the CBN accompanied by clarity on exchange rate policy and supportive fiscal and monetary policies.

“In the medium term, the CBN should step back from its role as main forex intermediator, limiting interventions to smoothing market volatility and allowing banks to freely determine forex buy-sell rates,” it stated.

The CBN implements a multiple exchange rates regime with different rates adopted by different segments of the economy. The operating exchange rates include the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) also called the Investors and Exporters (I&E) forex window, parallel market rate, International Air Transport Association (IATA) rate, Interbank Exchange Rate and Bureaux De Change (BDC) rate.

The parallel market rate is the most widely used rates for retail forex transactions, while the NAFEX window controls over 60 per cent of official foreign exchange deals. The NAFEX is now the official rate indicating a move towards exchange rate convergence. Speaking on the value of the naira, an economist, Tope Fasua, advised the CBN to withdraw all 6,000 BDC licenses for re-issuance. He said the CBN should, subsequently, work with the BDC supervising body to consolidate them into not more than 100.

“This may mean that several could be merged such that they don’t need to go bring more capital. There are only 130 BDC brands in UAE, and 145 in the UK which are heavy tourism-oriented countries. BDCs are designed to aid tourism. So, what are we doing with 6,000 official BDCs and perhaps another 20,000 or more traders whom the association of BDCs president refers to as ‘ungoverned territory’. This evokes another specter of terrorism and neglect of governance,” he said.

According to him, the CBN should also meet form A (Invisible Trade) transactions forex demands to reduce the frustration around import transactions presently experienced by businesses. It should also deploy technology to curb the many incidences of attempted round-tripping by Nigerians who raise fake import forms. Fasua said: “Using tariff barriers against the 43 ‘unsupported’ items to reduce the excuses around those who say the CBN is encouraging them to approach unofficial sources. Tariffs non foreign toothpicks, Indian incense and candles, water, vegetables, eggs, fish, and other items which we are producing locally could be as high as 200 per cent and this could also enable some income redistribution.

“CBN should cause revaluations of the naira in the official markets to indicate market direction and move against speculators and currency attackers,” he added.

Global Chief Economist at Renaissance Capital, an investment bank focusing on emerging and frontier markets, Charlie Robertson, agreed with Rewane on the role of crude oil prices in naira stability. Robertson noted that the Nigerian economy has been going through a rough patch since 2014 when the price of oil crashed and earnings from the crude oil dropped significantly.

He explained that a persistently high inflation rate means a persistently weak currency. According to him, using the Real Effective Exchange Rate methodology, an approach used to determine the value of a currency vis-à-vis a basket of other currencies based on the relative trade balance, the naira is overvalued “by a good 20 to 30 per cent.”

He warned that with persistent inflation, the naira would depreciate to N1,000 per dollar in the next 10 years. Robertson urged the CBN to focus more on controlling inflation. The Managing Director, Afrinvest West Africa Plc, Ike Chioke, believes the incorporation of a long-term diversified strategy in fiscal policy is required to cushion shocks in various segments of the economy.

For him, the persistent pressure on the naira could have been minimised if a counter fiscal policy had been developed, as the CBN cannot continue to defend the naira with foreign reserves. “To reduce this pressure, an inward-looking policy (tax incentives, infrastructure development and production subsidy) should be emphasised to reduce the dependence on imported goods,” he said.

He explained that asides from oil receipts, the development of the agricultural sector will in the short term reduce the forex burden of food imports and in the long run, enhance foreign exchange receipts if its comparative advantage in the sector is efficiently deployed. He advised the CBN to stop subsidising the naira. For him, although such a step will lead to an immediate spike in the price of the dollar, over time, the laws of demand and supply will work in favour of the naira.

“Alongside this, maintaining different exchange rates for different kinds of transactions must end. This is called rate convergence. Since the current practice of the CBN pumping dollars in the forex market is essentially a subsidy for imports, which has made Nigeria more and more import-dependent, letting go of the subsidy on the naira will refocus the economy towards exports,” he said.

Other analysts insisted that Nigeria’s current managed floating exchange rate regime combined features of both the fixed and flexible exchange rate. They therefore advocated for a lightly managed floating exchange rate regime where the exchange rate becomes determined essentially by demand and supply forces. This would allow the CBN to intervene occasionally to moderate excessive fluctuations, which are prone in developing countries, including Nigeria.

As these policy implementations to save the naira are sustained, many Nigerians expect that the local currency bounces back to command the respect of both local and foreign investors. Until that happens, Nigerians and business owners will continue to bear the brunt of the ongoing dollar crunch with its multifaceted pains. (The Nation)

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