As CBN ‘Tactically’ Devalues The Naira

• NSE-listed Companies Lose Profits 

• Nigeria Yet To Address Real Economic Threat — Enobhakare 

THESE, indeed, are trying times for the Nigerian economy as measures by the Central Bank of Nigeria (CBN) to defend the naira, which has endured a bad run against the dollar at the interbank market in recent weeks, have impacted drastically on the stock market.  

   Experts say though the effects are far-reaching and the measures cosmetic, the prospect of an upward shift is not too far in the horizon.

     After trying out a cocktail of tactics to shore up the fortunes of the naira with no success, the CBN closed its twice weekly sale of foreign exchange through the retail Dutch Auction System (RDAS), a move which has been tagged by industry watchers as, ‘a tactical devaluation of the currency.’

    Traditionally, the CBN sells foreign exchange to banks and bureau de change operators every Monday and Wednesdays, but the value of the local currency has risen far beyond the rates the CBN sold in recent weeks, climaxing at about N213 to a dollar in the parallel market, which has been a serious cause for concern for the apex bank, since it seemed its efforts benefited only a few, mostly those at the interbank end. 

    In the last two weeks, however, the CBN has sold foreign exchange to lenders at N199 to N198, fractions higher than the previous N168 rate.

     Experts say the devaluation of the naira has left companies in the Fast Moving Consumable Goods sector (FMCG) vulnerable to exchange risks, as they rely mainly on imported raw materials to meet production. Manufacturing companies are also suffering under the weight of increased cost of operations and sourcing raw materials. 

    Even worse, the cost of currency devaluation is hitting hard on companies in the capital market. This is mostly as a result of loss in value of profits when weighed in dollars. For instance, Nigeria Stock Exchange-listed Honeywell Flour Mills, closed third quarter operations in December 2014, with less than one-half of the profit it made over the same period in the previous year. 

     “A currency devaluation loss of N903 million is largely responsible for the profit drop. Rising selling and administrative expenses against falling sales revenue has also hurt profit performance. A major drop in net finance expenses prevented a worse bottom line position for the flour milling company during the review period,” media reports have revealed.

    Available data from CBN’s website shows that from Thursday, February 19, the exchange rate rose from N168 to N199 to a dollar. The naira has performed better in a one-week period by dropping to N198 on Tuesday, February 24, and standing at the rate as at yesterday.

    In a recent statement issued and signed by the Director of Corporate Communications, CBN, Ibrahim Mu’Azu, the apex bank said it had to change tactics to close the official window to end the multiple exchange rates and preserve the country’s dwindling external reserves. 

    The apex bank expressed displeasure at the disparate official and interbank value of the naira, noting that it created room for “undesirable practices, including round tripping, speculative demand, rent seeking, spurious demand and inefficient use of scarce foreign exchange resources by economic agents.”

     In view of this, Mu’azu said, “it has become imperative that appropriate actions be taken to avert the emergence of multiple exchange rates regime and pressure the country’s foreign exchange reserves. Consequently, we wish to inform all authorised dealers and the general public that with effect from the date of this press release, the rDAS/wDAS foreign exchange window with the CBN is hereby closed. Henceforth, all demand for foreign exchange should be channeled to the interbank forex market.”

    The apex bank also maintained that it would “continue to intervene in the interbank foreign exchange market to meet genuine/legitimate demand.”

    Commenting on the development, financial analyst and lecturer at the University of Benin (UNIBEN), Ikponmwosa Nosakhare, said even with the slight change, the idea of devaluation, by whatever guise, was a face saving measure, noting that the handlers of the country’s economy have not addressed the real threat. 

     “For the country to get over with the need to devalue the naira, it must be productive. We need to go back to industrialisation, which would get the country in a position to export more than it imports. When you export, it means that people need to by your local currency to pay for your goods and services; for importation, the reverse is the case,” he said.

    He noted that companies listed on the stock exchange, who import raw materials for their operations, would run into loses, and this would affect their ability to pay dividends to shareholders. 

    Noting that the prevailing sentiment in the stock market was unfavourable because of the value of the naira, he predicted that traders would be tempted to sell their stocks.

    Asked if there would be better days ahead, he said a lot of uncertainty still plagues the market, such as political risks — because of the upcoming elections — and dwindling oil prices, among others.

     According to him, “there is hope that the trend might reverse in the near future as since the economy is down at the moment, the next direction would be upwards.” 

     On how much companies in the country can survive the downward trend, he said that no one can provide a valid answer to the question, stressing, “the market does not only respond to fundamental factors, it also responds to sentiments, which include psychological and technical factors. These could jack prices up arbitrarily by themselves. But the impacts of the fundamental factors are what the market is experiencing. 

     “For instance, prices in the capital market can drop to a significant level that people might say because the stocks are undervalued, they decide to hold on. On the basis of that, there may be a trend reversal.”