Less than two months to the end of the year and few weeks to the yuletide season, there are fears that the local currency may literally take a lot of ‘beating’ due to factors not unrelated to surge in demand and supply of foreign exchange, inflation to mention just a few.
Top say that the naira is being overly pampered is stating the obvious. Thanks to the Central Bank of Nigeria (CBN), the local currency is being protected from experiencing a free fall and literally falling on evil days again as it was in the distant past.
History of CBN intervention
From available information, the CBN has injected about $25.68bn to stabilise the nation’s currency in the foreign exchange market between January and August this year alone.
The $25.68bn was based on analysis of the monthly economic report released by the apex bank.
The $25.68bn intervention is aimed at boosting liquidity in the foreign exchange market.
The CBN usually intervenes in the foreign exchange market by injecting liquidity about three times a week.
The intervention is usually provided to authorised dealers in the wholesale segment of the market, as well as other sectors of the economy such as agriculture, manufacturing and small and medium enterprises segment.
Customers that require foreign exchange for invisibles such as tuition fees, medical payments and Basic Travel Allowance, among others, are also allocated funds from the intervention.
An analysis of the intervention showed that the apex bank injected about $3.56bn in January while February, March and April each had $3.35bn, $3.75bn and $2.43bn respectively.
The CBN intervention in the month of May was estimated at about $2.04bn, June $2.5bn while July and August had $3.46bn and $4.59bn.
The report reads in part, “The bank continued to intervene in the foreign exchange market to further sustain improved liquidity and relative stability in the market.
“Thus, a cumulative sum of $4.59bn was sold by the bank to authorised dealers in August 2019, compared with $3.46bn supplied in July 2019.
“This indicated an increase of 32.5 per cent and 18.5 per cent above the levels in the preceding month and the end of the corresponding period of 2018.”
The report stated that interbank sales rose by 67.7 per cent to $0.21bn, compared with the increase of 50.3 per cent in the preceding month.
It said Bureau De Change sales rose by 1.3 per cent to $1.29bn in August, while swap transactions fell by 14.1 per cent to $0.34bn below the preceding month’s level of $0.4bn.
Justification for CBN intervention
The CBN Governor, Mr Godwin Emefiele, said the management of the apex bank understood the importance of exchange rate stability for price and monetary stability as well as its ramifications for overall macroeconomic stability.
He said the CBN would continue to ensure that stability was maintained in the foreign exchange market.
Speaking in an interview with Prof. Jonathan Aremu, an erstwhile staff of CBN, he said, in the first place, the CBN has the power to be able to protect the naira.
“The CBN has the power they have the micro economy to know when to apply the break before things turn sour. The major reason why people are feeling that things may get bad is because they are inputting political motive. We may not be able to know what is wrong because we don’t have background information. But the CBN has such information.”
Pressed further, Professor Aremu, who holds the view and very strongly too that the CBN can go ahead to defend the naira particularly when it becomes apparent that the naira will have so much loss from the economy.
“Because without defending the naira other things we may lose may be more than and that is if we allow it and these are the negative implications of it. If they weigh those alternatives and discovered that the advantage of defending the naira far outweighs the negative implications.”
All the countries in the world, he noted, “Actually makes sure that it is able to make sure that the value of their domestic currency is remains stable and prevented from the vagaries of the economy.”
Nigeria, he noted, “Operates a more open economy relatively to other West African countries and therefore, there are some countries where you cannot carry money in and carry money out the way you will do in this country. If the demand and supply is becoming more and as much as possible they can use step in to protect the naira and allow naira to come up in terms of the value.”
Echoing similar sentiments, Francis Atama, a financial analyst said, the responsibility to defend each country’s currency is an act of the Central Bank and one of its major mandates is to defend the strength and value of the currency.
Mallam Aminu Gwadabe, President, Association of Bureaux De Change Operators of Nigeria (ABCON) is also on the same page with Atama.
According to him, the intervention by the apex bank has done a lot of good to sustaining the stability of the naira.
Speaking with our correspondent at the weekend, the ABCON boss reiterated that the intervention has done a lot.
On how the bureau de change operators have, Gwadabe said, “We have contributed in the areas on rate conversions. The difference we usually had with inter-bank and the parallel market is no more there. Volatility has been removed completely. We’ve also contributed to stability and liquidity. People now don’t buy and keep dollars again because of fear that the rate would crash or go up. And so, we have given comfort to parents who pay school fees abroad, to manufacturers who need to plan their stocks, whilst we’ve also contributed to the employment chain with over 5,000 registered members. Each bureau de change has a minimum of four directors and three staff. The multiplier effect of that number of the economy can’t be over-emphasised. We are also formalising the informal sector in terms of statistics. The central bank can now follow their dollars unlike before when they didn’t have track records. We render returns of what people buy to the Central Bank of Nigeria. We are proud of our contributions and we’ll continue to do more.”
On the role of the BDCs with the banks, he said, they are partners in progress. “What we are saying is limit the banks to wholesale foreign exchange transactions and give the bureau de change retail transactions. That is what is done in other climes. The banks should not be engaged in selling $500-$1,000 to travellers. It should be within the purview of Bureau de Change operators.”
There are stages. You cannot control what you don’t own. The currency of import is the dollar which we don’t have. We need to earn more dollars to continue our import. Till date, our industries are in comatose stage, not functioning. We don’t have electricity. We are just improving our food production, and these are primary products. They are not even processed because there is no value chain. We are an import-dependent economy. China can easily devalue its currency, because 95 per cent of what they produce is going to be exported, same with Malaysia which produces animal feeds. Till date we are talking of integration, draft and framework. A case in point is the African Continental free trade agreement (AfCFTA), we are talking of draft of an effective integration model. The infrastructures, transport and electricity are not there. Even our petrol is refined abroad. Anytime the price of crude oil goes up, it puts the government in crisis because the refineries are not working. The integration is not there. America, Europe is now at the last level-currency level. Except if you want to grind the economy to a halt, you may then devalue. If not, lets improve our productive capacity we can then begin to have some exclusiveness.
“The 42 items have helped in ensuring stability in the system, it’s a good step. So we should continue on such policy trajectory that would enhance productivity in the system. Then we can say we want to devalue our currency. No country will allow its currency to be determined by demand and supply forces. America is strong today not because of weapons, but because of the power of the dollar. That is why other advanced countries want to bring down the power of the dollar, thus neutralising America’s power.
“It’s unfortunate, anytime there is a crisis, we become the easy target and people say we are the cause. There is a misconception. It’s a misnomer. It’s not true, it’s not correct. There are different foreign exchange operators in the system. The unparalleled, unregistered markets are part of it. Sometimes, journalists don’t seem to get the difference between the licensed and unlicensed operators. It gives us concern. We need to make this distinctions always so that we can appreciate the role registered operators are playing in this economy. We remain the most potent exchange rate management tool of the Central Bank of Nigeria.”
Going down memory lane, he recalled that in the 80s, there was structural adjustment programme, import licensing and Dutch auction system. “Because of the role the Bureau De Change has played, we have started hearing of windows of supplies opening- Financial Markets Dealers Quotations (FMDQ). We proposed the basis of Financial Markets Dealers Quotations, and today it’s one of the biggest windows that the Central Bank of Nigeria is using to neutralise any volatility in the market. If we had been identified as people that are giving support, I think this notion of saying we are the cause of volatility would not be there. I’m happy regulators and security agencies are beginning to see us as a contributory party.”
Fear over weaken naira
The weakest drop in the naira was in 2018 as the currency exchanged N370, weaker than N363 per dollar it has been trading since January 2018.
The currency closed flat at N470 and N412 at the parallel market against the British pounds and Euro respectively.
Traders also alleged that some black market outlets were hoarding dollars as fears in recent sharp fall in oil prices could lead to a shortage of the dollar.
Faced with the prospect of a weakening naira, the CBN had in 2015 stem the currency’s decline by curbing dollar supplies for imports on 42 products from glass to toothpicks.
While the central bank wants to boost local food production, there are other reasons for the urgency. Africa’s largest oil producer has a record 9.6 trillion naira ($27 billion) of government securities that have to be repaid by the end of December. The country’s current account, the widest measure of the trade in goods and services, swung to a deficit in the first quarter, while the price of crude, which generates 90% of the Nigeria’s foreign exchange, has dipped below the $60 level that the state’s budget is based on.
Over the past three years, authorities have relied heavily on open-market operations, in which government securities are sold at special auctions to control the amount of money in the financial system.
Global factors, such as the U.S.-China trade war, slowing global growth and an increase in shale oil production could further “make or mar” the central bank’s efforts to stabilise the naira, Chapel Hill Denham researchers, led by Tajudeen Ibrahim, said. Efforts to contain food imports also risk failing because of porous West African borders, which will not only have the unintended consequence of costing the government lost revenue and spur inflation, but also push demand for foreign exchange to “alternative markets,” they said.
But to many analysts watching the trend, they are not really convinced that as the year glides to an end, it remains to be seen how the naira will fare among its greatest rival, the dollar. Would the naira experience a spike or a have a breather? Time will tell.
report Ibrahim Apekhade Yusuf and Medinat Kanabe