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Forex Trading: Why Policy Can’t Check Speculation On Naira

By Mathias Okwe (Assistant Business Editor, Abuja)   |   31 January 2015   |   4:30 pm

USDOLLAR-

•It’s Counter-productive, Meant To Appease J.P Morgan — Expert 

•It’s Not True; Policy Will Ease Economy, Says CBN

IN whose interest is the recent foreign exchange (forex) trading policy regime announced by the Central Bank of Nigeria (CBN) which allows Deposit Money Banks to hold 0.5 per cent of net open trading position of Shareholders’ Fund, up from the former 0.1 per cent level?

   The new policy simply allows banks more time to hold on to more un-traded forex, particularly the United States Dollars before returning them to the apex bank as unsold. In sum, it means more dollar liquidity in the system to combat the seeming scarcity following dwindling fortune from crude oil, which has continued to be Nigeria’s only major foreign exchange earner. The development has continued to take its toll on the Naira, as it has come under serious pressure, continually loosing value due to Nigeria’s insatiable appetite for the Green Bag.

   Now, while the CBN Governor, Mr. Godwin Emefiele, thinks that increasing interbank dollar liquidity will stave the scarcity and get some reprieve for the Naira, which has fallen to a shocking low of between N200 to N 205 per dollar in recent weeks, a development economist and social commentator, Mr. Odilim Enwegbara, argued that it would worsen the situation. He  insisted that the policy was hastily undertaken to appease the J.P Morgan Government Bond Index-Emerging Market (GBI-EM) Watch list, which a few days earlier raised the alarm on Nigeria’s foreign earnings position and placed her on negative watch.

   In the thinking of Mr. Enweagbara, J.P Morgan’s threat was to ensure that Nigeria saturates the banks with enough dollar liquidity to make it easier for its portfolio investors in Nigeria to repatriate their funds, particularly in the face of heightening drums of war in the build up to next month’s General Election. 

  The action, he added apart from encouraging capital flight, would ultimately take a toll on the country’s already decimated foreign reserves.

   But the CBN Governor’s special adviser on Communications, Mr. Ugo Okorafor, countered this position saying the new policy was rather aimed at strengthening the Naira and checking the dollarisation of the Nigerian Economy. 

   Okorafor told The Guardian: “We don’t want to dollarise our economy. What the new policy is all about is that we will allow you to keep 0.5 percent of untraded dollars (relative to your bank’s shareholders’ fund) for 72 hours, after which you can then return them to the CBN. It means the higher the bank’s shareholders’ Fund, the higher the unsold dollar amount the bank can hold. 

   “Now, how can someone say we are responding to the J.P.Morgan alarm? The whole thing is funny and laughable. It’s a very narrow-minded thought. You and I know that if a foreign investor comes into Nigeria, he brings his Dollar and you give him your Naira, when he wants to go back, he gives you your Naira and you give him back his dollar. This is not peculiar to Nigeria. Don’t Nigerians also do business outside Nigeria? Don’t they repatriate their profits back home? That is why I say it is ridiculous for anybody to be saying we were panicky and reacting to appease J.P Morgan. What we found out is that when you allow banks to hold these ungraded Dollars for long, they begin to speculate on it that is why we said after 72 hours, return it to the CBN. 

    At the last MPC meeting, before the eventual raising of the net trading position to 0.5 percent, the CBN Governor, Mr. Emefiele, had described JPMorgan’s placing of the country under negative watch list as ill-informed, adding, however, that CBN would not relent in its efforts to ensure that Nigeria remained in the JPMorgan’s Emerging Market Index.

  Emefiele described the plan of JP Morgan’s action as result of misconception that the nation’s bond and foreign exchange markets were illiquid. 

   According to him: “CBN’s net open position on foreign exchange trading by banks, was reviewed upward to one per cent of shareholders’ fund, when we assessed the previous policy direction.   We also meant in our policy directive that banks should close their trading positions daily, as opposed to 24-hour trading, because of assessed volatility in the market and suspicion that there was speculative attack on the currency, not because of liquidity issues.

  “As you know, we have the core mandate to defend the economy and the Naira and would not let down in our efforts to achieve this. However, we would engage the team of JPMorgan further with our figures as evidence of our claims and we are confident they would see reason with us.

 “It is possible that after this pronouncement, we look at the position and the market and feel comfortable, we may come back tomorrow to review the net open position further. We must reiterate that we have the core mandate to defend the currency and the exchange rate of the Naira.

  “We also need to make it clear that we are monitoring the market to see that the interbank market will continue to support trading activities of both Nigerians and foreign investors and that at any point we discover that the market is unable to absolve or to provide the liquidity that is needed, the CBN will come with intervention that will provide the liquidity that needed for transactions to go on and these must be for legitimate transactions.”

    But Enweagbara said it was wrong for the CBN to act the way it did and recommended that Nigeria withdraw from the J.P Morgan Bond Index and, instead, introduce a quantitative easing to help address the fiscal challenges currently being faced by Nigeria.

   “I think that the CBN’s raising of banks’ net Forex trading position to be held the end of each trading day from 0.1 per cent to 0.5 per cent of shareholders’ funds, which allows banks to hold more dollars for trading in the interbank market, is not made because it is in the best interest of our financial economy, but simply to pacify the hegemonic JPMorgan, which also was acting in connivance with local banks and their foreign counterparts, all taking full advantage of our highly arbitraged financial market. 

“ In order words, by appeasing JPMorgan, the CBN has indirectly allowed speculators and arbitrage seekers to continue their attacks on the naira, draining our foreign reserves in a way that increases capital flight from Nigeria at a time we should be rolling out some draconian measures to conserve and channelling our foreign reserves for mostly critical growth input into the economy. Because of this wrong monetary policy stance, naira has been depreciating in value with the country’s scarce foreign reserves fast eroded.

   “With naira today trading at N200 per dollar, we are only beginning to lick our wounds, unnecessary wounds the CBN has caused us, which would have been avoided had Emefiele listened to the words of wisdom, including mine, which called for a far-reaching devaluation of from N155 per dollar to as high as N250 per dollar. Had not less than 50 per cent devaluation taken place rather than 13 per cent (N155 to N168 per dollar) in late November 2014, we would have saved the loss of billions of dollars, a huge drain on our scarce foreign reserve accounts.

Today, notwithstanding the efforts to artificially prop up the naira, it continues its inevitable free-fall, in search of its true value in a country whose appetite for foreign made goods continues unabated, seriously displacing local efforts in producing the same imports goods. 

   “In a system that is driven by some level of common-sense, curtailing import pressure should have necessitated not only raising the amount of naira exchanging a dollar, but also making sure that the country’s scarce foreign reserves are only made available to those sectors of the economy that are out to encourage domestic production and job creation. 

    “In other words, had the CBN fully devalued the naira based on the prevailing oil price plunge, no doubt, we wouldn’t have lost the billions of dollars we recently lost in defence of the indefensible naira, or subsidizing imports at the expense of locally made goods by artificially propping up the naira. 

   “Of course, had we fully devalued the naira by as high as N250 per dollar, banks and their foreign connivers speculating and taking arbitrage advantage of the country’s financial market coupled with the unheard-of high interest rate policy of the CBN, they would have lost hundreds of billions of naira and billions of dollars of shareholders’ and depositors’ funds. Little wonder, the cosmetic devaluation was needed to enable these speculators along with banks to gradually exit the naira before the CBN should pursue the inevitable full-scale devaluation. 

Time to adopt our own version of Quantitative Easing: 

   “While we have lost billions of dollars of our scarce dollar reserve account because of the disjointed monetary policy of the CBN (driven by narrow interests), it is not too late for us to pursue liquidity expansionary policy adopting our own version of Quantitative Easing (QE).  If not for anything else, QE should be used to pay off our N10.08 trillion domestic debts which are costing us the unheard-of N943billion to service in 2015 alone. 

   “Adopting QE, in our case, should also mean our exit from the current dollar standard, which has been depriving the economy—particularly the real sector—the liquid needed to grow and diversify the economy without having to preoccupy ourselves with the value of the naira to the dollar, especially if all the protective and high tariff measures accompanied system liquidity increase. 

  He said Quantitative Easing that was first adopted by the Roosevelt administration in 1933, not only succeeded in stopping the country’s bleeding Great Depression caused by illiquid system, but also flooded the illiquid US economy with cheap dollars,  even as the bankrupt real sector was quickly brought back to life. 

   The economist explained that, through repeated QE, along with fiscal stimulus policy between 2009 and 2013, the Obama administration too was able to avert the looming economic recession the country was facing as a result of the 2008 global financial crisis, which eventually devastated the euro zone economy that adopted tight money supply and fiscal austerity. 

 According to Enweagbara: “Given America’s huge economic growth success that accompanied the US Federal Reserve’s Quantitative Easing, along with unprecedented expansionary fiscal  stimulus package of the Obama administration that has continued to put the US economy on the path of such unexpected high growth, the European Central Bank (ECB) too adopted QE on January 22, 2015 even though belatedly, given how the euro zone’s illiquid economy forced it into a deep recession with millions of jobs and export competitiveness lost to China and the US.”

   He argued that, with trillions of euros flooding the illiquid euro-zone economy as a result of the QE, Europe will soon not only reverse its current recession but also begin to grow with jobs. 

  “The only caveat,” Enweagbara said, “is that it is not going to be a smooth ride for the euro, which is expected to witnessed on the first day of the QE, a run on the euro, because unlike the dollar which enjoys de facto reserve currency supremacy thanks to the fact that the whole global oil supply and demand is priced in dollar, the world can dump the euro.  

  “No matter the world’s run on the euro, the fact remains, euro currency devaluation through QE will be a success since it will not stop the ongoing recession in the euro-zone but also will eventually path on the growth path and jobs. Another QE to watch is the one just announced by the People’s Bank of China, which intends to inject billions of dollars into the banking system to boost Chinese lenders’ liquidity to spur the recently slowing Chinese economy. It is being speculated that with China joining the US and the EU in the use of QE to loosen money supply, Chinese economy should soon return to its lost years of double-digit growth, Mr. Enweagbara posited.




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