Naira: Struggling to keep currency alive
It has certainly been a wild and weird year for the naira, especially considering that the country is currently facing an economic crisis, mostly built around United States dollar shortages, precipitated by volatility in the international price of crude oil.
Experts are unanimous that the fundamental strength for G10 currencies is due to the stable economic landscape of their respective countries, particularly the improving macroeconomic conditions in Europe, which have heavily supported the Euro, while pounds sterling and dollar globally are still gathering strength, despite their ongoing challenges.
An economist, Dr. Biodun Adedipe, said a mix of the country’s economic structure, the resulting level of foreign exchange earning capacity, and the outlook have worked to keep the value of naira under persistent pressure.
According to him, the country must improve its offerings in the international market, in terms of quantity and quality, otherwise breaking away from the oil economy, particularly earning foreign exchange will remain a source of shock.
“The exchange rate will be pressured continuously, because we import heavily with foreign exchange earned from near single source, and when the source is pressured, speculations, anxiety and fears take over the economy,” he said.
Of course, the argument of currency dealers, foreign investors and their local counterparts has long been that the combination of multiple exchanges and assessed “unnatural peg” left the naira in the dust, compared to its global counterparts.
The more liberal ones have also added the economy’s heavy exposure to external risk, as an option that has given the monetary authorities a little respite from blames.
There is still the sentiment that while the naira has undeniably displayed stability in recent months, as the Central Bank of Nigeria (CBN) sustains its interventions, it may not be enough for the currency to continuously contend with the heavyweights, especially with the poor state of infrastructure.
CBN Governor, Godwin Emefiele, has severally listed poor infrastructure and its implications on business environment as an added challenge to persuading deposit money banks to channel credit to the real sector, and in the middle of the dilemma of monetary policy and exchange rate management.
In fact, CBN’s Financial System Stability Report, blamed the country’s challenging economic situation, which includes foreign exchange crisis and its impact on all productive sectors, for the banking industry’s Non-Performing Loans (NPL) ratio that rose from N1.7 trillion in June 2016, to N2.084 trillion in December 2016.
Besides the challenged oil sector that reduced government’s receipts, the expected fiscal stimulus and non-oil federal receipts, as well as improvements in economy-wide non-oil exports, especially from agriculture, manufacturing, services and light industries, were all disappointing.
Emefiele affirmed that while CBN has been dynamic in policy options to support the foreign exchange market, and fight the one-time soaring inflation to restore faltering prices and financial stability, the economic structure and outlook remain challenging.
To address the ongoing challenges, he explained that the CBN introduced policies at both the management and the Monetary Policy Committee (MPC) levels, targeted at stabilising the economy.
A currency analyst at Cyprus-Based FXTM, Lukman Otunuga, pointed out that the major and most critical difference between the naira and currencies of Egypt, Libya and other less endowed African countries, is the painful exposure it faces from external risks.
“It should be kept in mind that oil prices have a deep-rooted relationship with the nation’s external reserves, a drop in oil therefore, is likely to reduce dollar supplies and ultimately impact the stability of the naira exchange.
“Unlike other nations in Africa, Nigeria’s dependence on oil to ensure healthy government revenues and economic growth has reached its upper limit. While this seemed like an effective strategy when oil was trading at over $100, the failure to diversify and utilise the supernormal funds to boost infrastructure has come back to bite the nation,” he said.
Otunuga continued: “Although oil price volatility and United States monetary policy speculations may impact the naira, steps have already been taken to break away from oil reliance, which should shield the nation from external shocks.
“While the naira currently trades around N364 on the parallel exchange, which is N50 Naira higher than the official rate of N314, major reforms may be needed to bring back the days of N150 to the dollar. I feel the CBN needs to rectify the multiple exchanges dilemma, while simultaneously allowing natural supply and demand to determine the true value of the Naira,” he said.
Admitting that such a move may lead to a sharp depreciation in the immediate, he expressed optimism that there is still a possibility of price appreciation in the longer term as economic conditions stabilise.
Citing the receding inflation numbers, which recorded the fifth straight month decline in June, to 16.1 per cent, he said it is the continued signs of price stability in 2017 that are likely to stimulate investors’ confidence.
“The constant intervention in the forex market is slowly closing the disparity between the parallel and official exchange rate, and the cost-push inflation concerns have somewhat receded,” he added.
While there are arguable multiple exchange rates at various segments of the forex market, they are as part of strategies to eliminate “frivolous demand” for the hard currency, that are fast converging.
Presently, the naira is exchanged at N315 per dollar at the interbank window; N360 per dollar at the Invisibles Segment; N362 and N365 by licensed Bureau De Change operators; N365.33 at newly inaugurated Investors and Exporters Window, and N366 at the parallel (black) market.
But since February this year when the CBN liberalised further the foreign exchange market, it has put in not less than $5 billion, most of which are in forward sales, with maturity dates ranging from 30, 45, 60 days to one year.
Despite the interventions, which hugely played a part in facilitating naira’s rebound from all-time low of N520 per dollar in February to N365 per dollar at the parallel market now, there are concerns that the exchange rate should have moderated to below N300 per dollar.
The Acting Director, Corporate Communications Department, CBN, Isaac Okorafor, has continued to reassure of the bank’s commitment to sustain liquidity in the market in order to ensure that genuine requests for foreign exchange are met.
The reassurance has been ongoing and matched with action to improve liquidity and flexibility in the market, since after the apex bank’s adoption of a radical approach in February 2017, in defence of the local currency, amid huge demand, speculations and faltering foreign exchange inflow.
Various policy teaks have evolved within the period- pegging the exchange rate for invisible items at N360 (banks) and N362 (licensed Bureau De Change); and the inauguration of investors and exporters window, supported by consistent pattern of dollar auctions.
Okorafor noted that the leadership of the CBN was upbeat with the positive impact its current foreign exchange management is having on the manufacturing sector, agriculture and economic activities across the country, particularly the CBN governor’s desire to achieve stability and ultimately ensure convergence of all rates in the market.
Besides, the decision to keep huge reserves, while the country shops around the world for debts at a cost to the economy has been queried, particularly the sustainability of the debts in the midst of dwindling national earnings.
A top source at the CBN said that just as the name “foreign reserves” implies, it is official public sector foreign assets that are readily available to, and controlled by the monetary authorities, for direct financing of payment imbalances, and directly regulating the magnitude of such imbalances, through intervention in the exchange markets to affect the currency exchange rate and/or for other purposes.
The source reiterated that as long as the debt deals are brought into the country and transparently applied to development of needed infrastructure, there are no negative effects on the exchange rate and the economy in general, because development projects are self- sustaining.
According to him, reserves are not meant for domestic borrowings, but a boost to country’s credit worthiness and reputation, and to provide a cushion at a time when access to the international capital market is difficult or not possible.
“It is only in industrialised countries where the manufacturing sector produces for export markets, the transaction needs for holding reserves is less important,” the source said.
Weighing in on this, Otunuga, reiterated that, “Nigeria cannot afford to stabilise the naira without foreign exchange inflows, as new attention is directed towards MSCI Emerging Market Index’s decision on the country, which holds some investment decisions by the side, and the pending second quarter growth reports, which should offer further insight on how the nation is faring,” he said.
While stressing that time will tell if the country’s rising debt profile is sustainable, he lamented that although borrowing may be necessary to finance infrastructure and support economic activities, the question of how the funds were managed and reflected on output remains topical.
“Nigeria’s total debt surged to N19.16 trillion as of 31 March 2017. Although the nation’s current debt-to-GDP ratio is roughly 19 per cent, lower than 40 per cent suggested for emerging market economies, the rising trend is the last thing needed during a period when the economy is facing many internal and external challenges,” he said.
For Managing Director of Afrinvest Securities Limited, Ayodeji Eboh, the decision to peg the exchange rate at a level for a long time, despite the pressure on the naira, eroded investors’ confidence and put the economy in a totally wrong mix.
“This created an avenue for round tripping and all sorts of unethical practices in the foreign exchange market. It also created significant uncertainty in the economy as companies became unprofitable due to the volatility in the foreign exchange rate as well as limited access to foreign exchange to purchase inputs for production.
“The delay in decision making process by the government, and tactless confrontation with militants aggravated this problem, as it also created its own version of challenge to monetary policy. These will take time to resolve,” he said.
Eboh noted that so far, N2.3 trillion has been added to the national debt stock since the beginning of this year, a situation that has impact on exchange rate dynamics, especially with falling oil prices and dwindling revenues of government.
Managing Director of Cowry Asset Management Limited, Johnson Chukwu, noted that despite the huge publicity for diversification, the economy still relies heavily on oil proceeds to fund its importations, a signal to investors that we can only honour our obligations once the oil price is positive.
According to him, the long period of fiscal policy failures have exerted enormous influence on the economy overtime, and these have a direct impact on the exchange rate.
“Nigeria, apart from adopting agriculture, should pursue the development of raw materials from the sector, as well as other value chains. It should not be a case of crude oil production and petrol importation,” he said.
Granted, the country’s economic backdrop remains challenging despite some signs of relief in the first half of 2017, economic activities contracted in the first quarter of the year by 0.6 per cent, but still better than three previous quarters. So, outlook is not totally gloomy.
Despite four quarters of negative growth, the non-oil economy, mainly dominated by private sector operators, who are affected more by the foreign exchange issues, grew by 0.6 per cent (year-on-year), while headline inflation decreased to 16.1 per cent in June 2017, from 18.7 per cent high in the period under review.
There is a rebound in manufacturing and continued strong performance in agriculture, which has also benefitted from the unconventional policies, while various indicators suggest an uptick of activities in the second quarter of the year, as the data is being awaited.
CBN now has made the foreign exchange market flexible as well as prioritise the most critical needs for foreign exchange, after restricting access to the foreign exchange for 41 commodities, which it saw as being unnecessary drains to the country’s reserves.
For agriculture as the largest employer of labour in the country, the CBN is working with relevant ministries and agencies, and has supported a revamp of the sector, through the Anchor Borrowers’ Programme (ABP), and other agricultural interventions. It has committed about N29 billion to the ABP with active participation of 24 states of the federation.