CBN’s interventions: Exchange rate to go down further

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By Emeka Anaeto, Babajide Komolafe and Prince Okafor

There were indications this week that the foreign exchange market may witness another round of sustained appreciation of the local currency, Naira, against world’s major currencies at the parallel market segment, while narrowing the premium.

This came at the backdrop of the resolve of the Central Bank of Nigeria, CBN, to sustain its fight against currency speculators which has entered third week.

The apex bank, Vanguard learnt, intends to sustain the fight with adequate supply of foreign exchange to all segments of the market while addressing imperfections and arbitraging with market intelligence and heavy sanctions on infractions by authorised dealers.

At the parallel market, the Naira/Dollar exchange rate closed at N462.00/US$1.00 last weekend, a moderate appreciation against the N465/USD high point reached during the week.

Market analysts at Afrinvest West Africa Limited, a Lagos based investment house are of the view that the CBN’s bullish interventions in the past two weeks are beginning to down on speculators’ attacks which had pressured rates beyond N500/USD last month.

They expect this development to rein in on exchange rates going forward.

Governor, Central Bank of Nigeria (CBN), Mr Godwin Emefiele

They stated: “In the week ahead, we expect the Central Bank to continue intervening with dollar sales at the interbank market while the exchange rate is projected to hover around current levels at that segment of the market. “Also, the CBN’s circular mandating banks to process and meet demands for PTA and BTA within 24 hours and School fees and Medical bills within 48 hours of application could further drive dollar demands to the official market, thereby relieving some of the pressure on the parallel market.”

In the same prognosis, analysts at Cowry Asset Management Limited, another Lagos based investment house, expect positive trend in the exchange rate this week at the backdrop of increasing foreign reserves which gives CBN the necessary muscle to sustain bullish intervention in the supply end of the foreign exchange market.

They stated: “In the current week, we expect further stability in the foreign exchange market due to likely increase in supply amid build-up in foreign exchange reserves.”

At the Vanguard Personality Of The Year Award on Saturday, CBN Governor, Godwin Emefiele, who bagged Personality Of The Year, stated that the apex bank was out for full scale market war to frustrate and run speculators out of business in the foreign exchange market.

He also alluded to criminal activities in the market as key drivers of Naira depreciation in the parallel market, arguing that the current parallel market exchange rate was not a true reflection of the real value of the Naira.

In his words: “Let me take a moment to address the gap between the interbank and parallel market exchange rates. We have seen the results of independent estimates of our exchange rate and we have also conducted in-house analyses of the appropriate rate. None of these results are anywhere near the rates in the parallel market.

“Even a simple Purchasing Power Parity analysis will confirm that the Naira is not as weak as the rate in the parallel market is suggesting. Even if one were to allow for risk pricing and other uncertainties, it does appear that there is no basis in our economic fundamentals to support the prevailing exchange rate at the parallel market.

“The only logical explanation to the high rates in that market therefore is that a lot of illegal and criminal activities are being carried out there.

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“Given this scenario, the CBN cannot sit idly bye and allow such faceless and criminally minded people to destroy the currency under the guise of a free float as is being canvassed by some so called experts.

“Let me also reiterate the central bank’s willingness, determination, and capacity to continue to meet all legitimate transaction-based FX demands in the market. I obviously cannot be of help to people or businesses who are into speculative FX demand. My promise instead to this group, whether foreign or local, is that the CBN will make sure they lose money!”

Industry chieftains kick

Meanwhile some economists and industry sector leaders at the Vanguard Economic Discourse last weekend, ex-rayed the current foreign exchange crises in the economy, the impacts and also offered options for resolving them.

The National Vice President of the Nigerian Labour Congress, Comrade Issa Aremu, who was a member of the Discourse Panel made the following observations: “Yes we must fix exchange rate. I think the exchange rate policy must drive production, must be seen to be stable and should be such that will promote public welfare. The recent one we have on Naira was done by speculators and in the process we are suffering from it. CBN has done few things and I think they could do more. There is a lot of distortions that they must address.”

The Director General of the Lagos Chamber of Commerce and Industries, LCCI, Mr. Muda Yusuf addressed the significance of the exchange rate regime as very central to Nigeria’s economic recovery plans.

He stated: “The foreign exchange policy regimes that we have experienced in the last two years or thereabout have had a number of effects. First, critical scarcity of foreign exchange for the manufacturing and other critical sectors of the economy has been affecting the capacity of a lot of investors to move on with their investments.

“Then there has been very serious transparency problem in the foreign exchange market across the entire chains. All manner of under-hands dealing have been taking place in the foreign exchange market across the entire chains. That has been a major problem in the market.

“Investors have suffered significantly, either dividends, profits, revenue; the airlines, for instances, are good example. There have been major disincentives to inflow of foreign direct investments either from exporters, from foreign portfolio investors.

“People have suffered very serious losses especially from transition of the former exchange rate regime to the current exchange policy particularly transactions we referred to as matured obligations.

“The servicing of offshore obligations has become very difficult to all businesses; in fact, many businesses have gone bad because of their inability to service offshore obligations.

“Also, a lot of businesses have lost credible credit lines that they relied upon for their services. All those credit lines have virtually vanished because of the issues of defaulting and credibility problem that has arisen from it.

“There is a huge incentive for round-tripping. If there is any business now that is very lucrative, it is round-tripping of foreign exchange because the gains are so huge that it will take an angel to resist round-tripping.

“Of course, we have the exclusion of 41 items. I agree with Professor Charles Soludo that we need to fix the liquidity issue in the foreign exchange market and the way to do that is to allow the market to play a much bigger role in the foreign exchange market.

“We should move away from allocation of dollars, pieces of intervention, and so on; the economy doesn’t work that way. So we need to give more room for the market to play the rule in the foreign exchange market. Then there should be full liberalisation of foreign exchange inflows into the economy.

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“Right now, there are too many restrictions on investors who want to bring money into the economy. It’s an irony; you have a supply crisis, you have people who want to bring in money into the economy to support you on the supply side, but you are creating problem for them. I mean one can’t really understand the rationale behind that kind of policy.

“So, as a rescue options, I think these are things that we need to tackle concerning the forex.”

In his contribution at the Discourse, Bismarck Rewane, Managing Director of Fianancial Derivatives Company Limited, a leading financial and investment consultancy in Nigeria, alluded to a pervasive under-hand dealings in the foreign exchange market that needed to be eliminated for the market to support the economy growth plan.

He stated: “We have these vested interest who are benefiting from the exchange rate system. It goes like this; I borrow money in intervention fund at 6 per cent. I use that money to invest in treasury bills at 18 per cent, I use the treasury bills as collateral to borrow money to buy foreign exchange at N305 per dollar, I sell the foreign exchange at N500 per dollar. Nobody in the world, even the Pope will not be tempted.

“So you must remove what is called structurally induced corruption. Corruption is not about missing money, it is about taking advantage of position to earn rent and selling patronage.

“February last year, February 11, on this stage, Comrade Issa Aremu, Governor Oshiomole, we were here debating about the Naira. On that day, the parallel market was N275 per dollar, on that day the official rate was N199.   The spread was N76 and was considered unacceptable, on that day, the price of oil was $29, it was 100 percent less than what it is today. On that day I said, if you do not reform the foreign exchange market it will be a catastrophe.

“An exchange rate is the product of the mechanism that comes from the market, if you don’t fix the exchange rate system, what you will have is what I referred to Fela’s song, ‘palaver’.

“On that day, the bankers committee met and made a comment that they have recommended to the CBN to remove education, medical bills and others from the interbank forex market that was 2pm. By 3pm the exchange rate went from N275 to N310, by 4pm it went up to N325.

“Then the CBN came out to say, we never said we would stop selling dollars for school fees and the rest as they say is history, in any case the exchange rate never appreciated, because the exchange rate is sensitive to signals, demand and supply and confidence.

“On June 22nd, 2016 CBN announced a flexible exchange rate policy, two months later it suspended 9 banks from participating in the foreign exchange market. The exchange rate moved that day from N410 to N430, the next day it moved to N440, within a week, we got to N490. CBN readmitted the banks back, but the exchange rate never came back.”

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