The naira faces one of the darkest eras in its over five decades’ history, crashing to a new low of N570/$ in the parallel market. This status paints a gloomy picture of an uncertain future that needs drastic action to fix. The Central Bank of Nigeria (CBN) has descended on AbokiFx, accusing the website of rates manipulation and illegal forex deals, allegations it denied. Accounts of eight Fintech firms were frozen for forex-related frauds as the regulator ordered that banks caught round-tripping will lose their forex licenses. COLLINS NWEZE writes that beyond these measures is the urgent need to raise dollar liquidity and bring reprieve to the troubled naira.
Moshood Abdulrasheed, a currency speculator, was preparing for the Suri prayer when he got a WhatsApp message that made him richer. His business partner, Abubakar Idris, had on September 16, informed him that the naira was exchanging for N570/$ at the parallel market.
Abdulrasheed hurriedly said his prayer, moved to the vault where he kept $100,000 to confirm it was intact. He then called five of his most trusted aides and gave them $20,000 each to exchange for Naira. “I made N159.25 extra on every dollar sold because I bought at N410.57/$,” he disclosed.
The transactions concluded within three hours because the number of manufacturers, importers and other end-users of foreign exchange (forex) waiting to buy the greenback, earned him N15.92 million profit.
Abdulrasheed is one of the thousands of currency speculators capitalising on the heightened forex supply shortage, demand pressure and 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.
The naira is exchanging at $410.57/$ on the Investors’ and Exporters’ (I&E) 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 17 years but in 2001 alone, its value was slashed 27 per cent. If one thinks that the 2001 debacle was worrisome, the naira has exceeded that loss, as it has depreciated by nearly 30 per cent this year alone.
At the parallel market, the value of the naira fell to N570/$ on September 17 from less than N520/$ it traded before the ban of forex sales to the Bureaux De Change (BDCs) on July 27, representing N50 depreciation in 41 days.
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/$), the recent adverse global capital flows especially to developing economies and drop in oil prices, among other factors, have culminated in the current low of N570/$ at the parallel market.
At the official market, the naira exchange rate has been severally adjusted to N305/$, N360/$, N379/$ and now $410.57/$ in the I&E window.
An economist, Bismark Rewane, explained why the naira was on the downside. “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.
Former CBN Deputy Governor, Financial System Stability, Prof. Kingsley Moghalu, said the most important determinant of the value of the naira is productivity and the competitive state of the economy.
He disclosed that currency speculators make a very good fortune from weakened currency. “Such traders “attack” currencies for profit, especially where the currency is using fixed, official exchange rate determined by the central bank instead of the market,” he said.
“If reserves are weak, and demand for dollars massively outstrips supply, currency devaluation is inevitable. Currency speculators borrow the naira from Nigerian banks, convert it to, say, dollars, then buy short-interest paying Nigerian bonds,” he added.
Continuing, Moghalu added: “If, as the speculators anticipate, the central bank devalues the naira, the traders sell the bonds in the foreign currency, convert them into naira, and repay the original naira loan. The steeper the devaluation the higher the speculator’s profit.”
Other factors like terms of trade, inflation differential, public debt, current-account deficits, interest rates, political stability and the overall economic health determine the exchange rate of a currency.
Hence, the fall in crude oil prices has reduced Nigeria’s dollar earnings, making it difficult for the apex bank to fund imports. Record oil prices had helped Nigeria to build the largest currency reserves in sub-Saharan Africa. The reserves peaked at $63 billion in September 2008. After attaining a record-high of $147 in July of that year, Nigeria’s crude oil prices – bonny light, plummeted to less than $40 per barrel before the current gradual uptick.
As of September 18, crude oil was trading at $73.33 per barrel while the foreign reserves stood at $35.27 billion based on September 11 data obtained from the CBN website.
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. The Organisation of Petroleum Exporting Countries (OPEC) predicts the price won’t go back above $100 until 2040.
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 Christmas 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, still puts pressure and creates a volatile situation in the forex market.
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 hard currency to buy 43 items, ranging from toothpicks and rice to steel products and private jets. The banks are also turning down payment requests from customers paying business partners abroad with naira debit cards.
They are now asking customers paying clients abroad to do so in the currency of the beneficiary’s country, not in naira. The new practice differs from the previous one where lenders debited the naira accounts of customers at the prevailing exchange rate and remitted dollar equivalent to the offshore beneficiary’s account.
Many banks are not only insisting that customers pay in the currency of the recipient’s country but through inflows from abroad in line with CBN’s domiciliary account policy. The policy mandated that only electronic fund transfers into domiciliary accounts can be transferred from such accounts to third parties while cash deposits into such accounts can only be withdrawn in cash.These policies have limited the ability of Nigerians to pay their foreign business partners. In an emailed explanation to a customer on why her transaction request was declined, GT Bank said a temporary restriction is placed on Dynamic Currency Conversion (DCC) on all banks’ cards was responsible. The DCC allows customers to pay in naira but has been temporarily restricted on all bank cards due to a dollar crunch.
The impact of dollar scarcity is also felt by the banks and multinational companies. Group CEO GTBank Segun Agabje said banks may not have enough dollars to fund clients seeking to acquire oil assets put on sale by the local unit of Royal Dutch Shell Plc.
For him, there is no likelihood of any client raising the estimated $2.3 billion needed to purchase the Shell assets, as the global oil giant prepares to exit its onshore oil position in Nigeria, which is no longer considered compatible with its strategic ambitions.
“When I look at the books of Nigerian banks today, I don’t see a lot of dollar liquidity,” Agbaje told an investor conference call in Lagos. “It’s becoming a very difficult deal for people to pull off.”
This has not always been the case for Nigerian banks which in 2013, syndicated $3.3 billion debt to Dangote Industries for a refinery and petrochemical plant and recently financed Heirs Holding’s $1.1 billion acquisition of Oil Mining License (OML) 17.
The Chief Executive Officer (CEO) of InvestAdvocate, Peter Obiora, said the dollar crunch has made it difficult for him to pay for server space for his online web business. He said unlike previously when he could use his naira debit card to pay for offshore transactions, now the card must be linked to a dollar-denominated domiciliary account that must be funded locally.
Former Executive Director, Keystone Bank, Richard Obire, said that just like a coin, the debit card restriction has two sides because Nigeria is integrated into the global economy, and her citizens should get intangible services that promote businesses. The use of naira denominated debit cards abroad, he said, is one of such benefits.
Overall, the economic downturn arising from the coronavirus pandemic curbed foreign-currency flows into the economy and pressured reserves. The pandemic pushed foreign investors to withdraw over $100 billion from emerging markets including Nigeria, between February and April last year.
Move against AbokiFx, Fintech firms
CBN Governor Godwin Emefiele last Friday accused the publisher of AbokiFx (parallel market rates publication website), Oniwinde Adedotun, of using the platform for “illegal forex trading”. He alleged that Adedotun lives in the UK and publishes arbitrary rates without contacting BDCs. However, AbokiFx management debunked the CBN claims, saying all allegations against its director were not confirmed.
“All allegations against our director are yet to be confirmed but we at AbokiFx do not trade forex nor do we manipulate parallel market rates,” it said, before temporarily suspending rate updates on all its platforms.
Likewise, Fintech firms have come under regulatory scrutiny after the Federal High Court, Abuja granted the request of the CBN to freeze the accounts of eight firms accused of using forex sourced from the Nigerian market to purchase foreign bonds/shares in contravention of its directive issued in July 2015.
The request granted by Justice Ahmed Mohammed, was filed by former Attorney-General of the Federation and Minister of Justice, Michael Aondoakaa (SAN), on behalf of the CBN. Aondoakaa said that the forex deals by the defendants were undercutting the strength of the naira against the dollar.
The affected companies include Rise Vest Technologies Limited, Bamboo Systems Technology Limited, Bamboo Systems Tech. Ltd., CTL/Business Expenses, Trove Technologies Limited, Chayomi Multi Services Limited, Ningbo Excel Enterprises Limited and Dagang Enterprises.
Some of the firms are owned by individuals and organisations based in the United States. Risevest, Bamboo, Chaka, and Trove have assured users of the safety of their funds adding that they are negotiating with government authorities.
Investigations showed that between 2014 and 2019, Nigeria’s Fintechs raised over $600 million in funding, attracting 25 per cent ($122 million) of the $491.6 million raised by African tech startups in 2019 alone—second only to Kenya, which attracted $149 million.
Way out by stakeholders
Despite the naira crisis, Managing Director – Head of Macroeconomic Analysis at EFG Hermes, investment banking service provider, Mohamed Basha, advised the CBN to use $6 billion Eurobond issuance expected later in the year to further devalue the naira. He said the upcoming Eurobond issuance potentially means that a $6 billion reserve boost would be available to the CBN.
“We anticipate the CBN to use this by devaluing the naira to N430/440, pushing the parallel rates (currently trading at N570) to converge to the said range. We believe the devaluation, which would still add some inflationary pressure, should be accompanied by a tightening of monetary policy in order to bring interest rates to levels that are attractive to foreign investors.”
Global Chief Economist at Renaissance Capital, an investment bank focusing on emerging and frontier markets, Charlie Robertson, agreed with Basha. Robertson noted that the Nigerian economy has been going through a rough patch since 2014 when the price of oil crashed. 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. “If the central bank can get inflation to three per cent and sticks there, then in 10 years the naira could be N400/N450 per dollar. So it’s all about inflation and the central bank’s success in fighting it,” he added.
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.
Moghalu 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. A lightly managed floating exchange rate regime is advocated given that 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.