November 26, 2018

The wrong way to defend the naira

naira notes


By Henry Boyo

THE Central Bank of Nigeria has injected over $10.97bn, into the Forex Market between January and October this year, to defend the Nation’s currency, the Naira, against other major currencies, including the dollar.” (See Punch Newspaper report of November 18th 2018 titled “CBN Defended Naira with $11bn in 10 months”).



CBN cuts GDP growth rate to 1.75%; indicates more inflationary pressures

The Punch report, explained that “the $10.97bn figure was arrived at, by our Correspondent, based on the weekly compilation of amounts released by the Apex Bank to boost liquidity in the foreign Exchange Market.”

The CBN’s Director of Communications, Isaac Okorafor, also noted, according to the same report that, “the availability of the dollar and the Renminbi (the Chinese currency) had reduced the pressure in Nigeria’s Forex Market;” consequently, Okorafor assured Nigerians that “the Apex Bank would sustain its intervention”, in the Foreign Exchange Market, not minding the impact on size of reserves, “until there was enough liquidity in the market.”

Naira gains 50 kobo against dollar at parallel market

The foregoing narrative may suggest that forex liquidity is seemingly, the main driver of exchange rate volatility. Notably, however, the estimated $20-$30bn annual inflow, from Nigerians, in the Diaspora, may not have been captured in the $10.97bn, quoted in the Punch report. Thus, total monthly average inflow into Nigeria’s forex market, may actually exceed $3bn.

Unexpectedly, however, the more modest value of CBN’s forex sales, is inexplicably popularly presumed to be the main driver of Naira exchange rate, even when the autonomous component of forex inflow may be relatively larger and more stable.

Notably, however, a cursory examination of CBN’s forex reserves, clearly indicates that Naira exchange rate bears minimal correlation with the size of “CBN’s External Reserves or forex sales;” in other words, rising reserves do not translate to stronger Naira rates! For example, in January 2012, Government’s Reserves, was over $34bn, while Naira exchanged for about N155/$1, but later slumped, unexpectedly, to N161=$1, even when forex reserves had risen well above $43bn!

Similarly, in 2013, External Reserves had become bolstered and fluctuated between $45bn in January to $42bn by December, yet the Naira rate remained sticky, between N153-N162/$1. Furthermore, the Naira rate actually weakened to N170-N199, in 2014, even when external reserves still trended favourably between $40bn-$34bn. However, when External Reserves dipped as low as $25bn in 2016, the Naira which, in January, was trading around N197=$1, was officially devalued to N305-N360=$1 before December, while the economy was, officially also confirmed to be in recession.

In retrospect, however, the Naira rate was conversely, as strong as N84=$1 between 1995-98 when total reserve was a very modest $4bn. Similarly, when one Naira exchanged for almost $2 between 1972-1984, official forex reserves was barely $390.71m!!

Instructively, however, External Reserves have, since 2017 climbed again above $40bn, but the Naira rate, still appears inexplicably stuck between N305-N360=$1. The obvious question therefore is, if dollar rate rose well above N300=$1, because reserves dropped below $30bn in 2015, why then, has Naira rate remained static between N305-N360, even after reserves have climbed, once again and remained stable between $40bn-$47bn, with current crude price nearer $70/barrel to provide possibly over 30 months cover to pay for imports; that is, even if CBN sustains monthly sales of $2-3bn of its reserves, plus the forex inflow from Diaspora, “to defend the Naira.”

It is sadly becoming obvious that CBN’s strategy of bombarding the forex market with dollar reserves has, as usual, once again, failed to stop Naira depreciation, even when dollar revenue derived from higher crude oil prices significantly increased beyond, the reviewed 2018 budget benchmark of US$50.5/barrel.

Although CBN’s Communications Director, Isaac Okorafor, indicated exchange rate stability as priority, rather than size of reserves, invariably however, rapid depletion of reserves would perfunctorily precipitate market panic and induce further reserve erosion, which could, ultimately, compel another huge devaluation of Naira below N500=$1. The social and economic impact of such a rate will inevitably fast track more Nigerians into poverty, and sustain our Nation’s odious title as the reigning “poverty capital” of the world!

It seems rather macabre also that, the CBN willfully depletes it stock of reserves to defend the Naira, through its regular, weekly auctions of hundreds of millions of dollars, to all and sundry at face value, while Government simultaneously, conversely, seeks dollar loans and pays upto 8% as interest on such debts despite CBN’s heavy cache of idle dollars!

The Bureau-de-Change market segment has invariably become a major beneficiary of CBN’s dollar sales, even when it is very clear, that dollars allocated to BDCs facilitate the transfer of looted public funds abroad.

Notably, the present administration has, inexplicably, obtained fresh $3bn foreign loan recently (November 2018) to compound the existing $10bn that it had already borrowed with over seven per cent rate of interest, since it assumed control in 2015, even when CBN still carelessly broods over a nest of over $40bn, from which, it regularly auctions rations from its reserves at face value, to allegedly, stabilize and determine the Naira exchange rate.

The above title “The Wrong Way to Defend the Naira” was first published in Vanguard Newspaper in April 2011, to reflect the perspective of the contradiction of higher External reserves while Naira exchange rate, inexplicably, conversely, remain sticky and under siege, even when dollar reserves increase significantly, and even exceed budget benchmark. Please read on.

“In practice, the Naira exchange rate is actually more a function of Excess Naira liquidity in a strictly regulated market in which small rations of dollars are auctioned intermittently by the CBN. Regrettably, such a market model will only spell disaster for growth and deepen poverty for our people.”

“In his acceptance speech, as Silverbird TV’s 2010 ‘Man of the Year’, CBN Governor, Lamido Sanusi ‘blasted’ IMF for inducing inappropriate policies that distort and repress our economy with little or no opposition, from Nigeria’s economy managers, who allegedly did not have the ‘balls’ to look the IMF in ‘the face’ and reject their poisonous pills!”

Specifically, Sanusi referred to IMF’s recommendation for a devalued naira as one of such ‘bad’ or anti-Nigeria recommendations.  Consequently, he rightly refused to play along with IMF, as he saw no observable benefits in a weaker naira, which would “trigger higher industrial production costs, fuel inflation, increase fuel prices and subsidies and increase our national debt burden.”

“Undoubtedly, Sanusi’s argument with regard to the need for a stable naira value appears more plausible; but the real question is, can the CBN Governor keep naira below N155/$1 within the context of the present framework that explodes Naira supply whenever distributable dollar revenue is substituted with naira, in monthly allocations to government?  This column has consistently maintained that naira substitution for dollar revenue is the poison in our economy, as it engenders a system that makes our economy and people poorer when we earn increasing dollar revenue, a veritable paradox if there was one!”