How speculators undermine efforts to sustain naira stability

The introduction of several forex management measures side-by-side with complementary interventions in food production and manufacturing have drastically reduced food importation, which hitherto constituted a large chunk of the pressure on the Foreign exchange (forex) market.

The outbreak of the Coronavirus, the declining oil price in the global market, has caused a decline in the nation’s reserve by N10 billion creating room for panic buying and currency speculations which has resulted to a drastic rise in the exchange rate.

The Central Bank of Nigeria (CBN) has indicated that it was alive to the responsibility of rescuing the Nigerian economy from the fallouts of the Coronavirus (COVID-19) induced global economic stress and stabilise the forex with some concrete steps it has taken to tackle some downside market developments.

Unfortunately, activities of speculators in the forex market have continued to trigger panic and pose a threat to efforts by the apex market regulator to stabilise the market.

There is no gainsaying the fact that naira is currently facing its greatest risk from the negative impact of COVID-19 pandemic, as currency speculators continue to make spurious demand for dollar with hope to make good returns from the rising gaps between official and parallel market rates

But as the CBN and Association of Bureaux De Change Operators of Nigeria (ABCON) finalise plans to resume dollar sales to Bureaux De Change (BDCs), foreign currency speculators will in the coming months face over N10 billion losses as the

Indeed, with over 5,000 BDCs spread across the country receiving weekly allocations for sale to the retail end of the market, and rising accretion to the foreign reserves to over $37 billion, the naira’s future looks bright.

Moreso, ABCON has continually warned forex speculators to retreat your steps or get ready to lose their life savings and businesses as the CBN has the financial muscles to sustain dollar interventions to businesses and economy to keep the naira stable in line with its exchange rate stability mandate.

The CBN’s Governor, Godwin Emefiele and President, Association of Bureaux De Change Operators of Nigeria (ABCON), Alhaji Aminu Gwadabe have in recent times, analysed the illicit business of currency speculations and its threats to the economy and naira stability.

Both leaders have also warned the currency speculators on the looming danger for their trade if they refuse to retrace their steps as they will incur losses estimated at over N10 billion in the next few months as the CBN prepares for BDCs return to the forex market after nearly six weeks of absence due to the Coronavirus pandemic and need to protect operators.

The fact remains that currency speculators will lose huge funds, that will likely be the beginning of the ending for their illicit businesses as the apex bank will soon begin dollar sales to over 5,000 BDCs operating across major cities nationwide.

Emefiele even went a step further appealing to industrialists patronising the parallel market to desist from such practices in the interest of the economy and for the sustainability of their businesses, failure which they will equally record same huge losses like the currency speculators.

Both Emefiele and Gwadabe have huge experiences in the market to predict what follows after every major crisis.

Like in 2016 currency crisis, the market got a major relief after the BDCs’ began getting dollar allocations from the CBN. That same scenario will soon play out as the CBN team and ABCON Management begins to count days for the BDCs return to the market.

He said the CBN has come to realize that BDC operators can be the difference between naira recovery and depreciation during volatile and uncertain times. That’s especially true now that the local currency has come under intense pressure that is purely driven by speculative demand for the dollar. Emefiele has warned domestic and foreign investors against patronising the unofficial market, saying it was helping to overheat that market.

Dollar sales have since resumed following a phased easing of the lockdown but foreign investor currency demand is yet to be met, analysts say.

Emefiele has warned firms and individuals against patronising the parallel market popularly called the black market.

He warned them to stop using black markets for foreign currency exchange, adding that patronizing the parallel market is helping to overheat the foreign exchange market.

“I know some of you are involved, stop now. By going to the parallel market, you are helping to overheat that market. Not only that, but you will also lose money because you would have bought it at a price that is not realistic. I can tell you that you are going to lose money. But we have seen your account already.

” We are appealing to you, please stop and let’s do what is right, what is legal, so that Nigeria can continue to be a good place for you and to live in,” Emefiele appealed to businesses patronizing parallel market.

Going further, he said, “We are taking note of some of you and I can tell you, go ahead and do your business, nothing will stop your forward, your forward will be at a committed price, we are going to provide more liquidity in the market so that people can stop going to the parallel market. Don’t go there because it is not good for you. But be patient, it’s going to be orderly’’.

The BDCs are essentially operators that help get dollars to the end-users no matter where they are and have for decades proven time and time again their relevance in stabilizing the naira.

Gwadabe said the CBN-licenced BDCs will soon start full operations as the apex bank will soon reopen dollar sales to operators.

According to him, with the CBN’s planned lifting of moratorium on dollar sales to BDCs, reopening of the airports for air travels, global ease on the restriction of movement are positive indications that dollar flows to the economy will soon improve.

He said the naira has been exchanging at N461 to the dollar at the parallel market but will be upbeat once dollar sales to BDCs commence.

He said: “The return of over 5,000 BDCs to the forex market will add great strength to the Naira and lead to major capital losses for forex speculators. It happened in 2016 and will happen again in 2020.

The return of the BDCs will immediately boost Naira recovery and put the enemies of the economy to shame. We are committed to the CBN’s exchange rate stability and will take all necessary steps within set rules and regulations to keep the naira stable,” he assured.

Gwadabe said the return of BDCs to the forex market will help chase away speculators, curb rising inflation, boost productivity and employment, enhance price discovery, enhance market transparency and competitiveness.

Aside from positive developments in the global economy, the CBN has taken action to address the risks facing the naira, which will lead to rapid recovery for the local currency.

For instance, the recovery in the Chinese manufacturing sector and opening of the Asian tiger’s economy after months of closure due to the coronavirus pandemic have raised the country’s crude oil demand, many of which will be bought from Nigeria. Such purchases will boost Nigeria’s dollar earnings.

Besides, Nigeria is one of the few lucky countries that have secured an emergency $3.4 billion loans from the International Monetary Fund (IMF) under the Rapid Financing Instrument (RFI). This fund will not only support Nigeria’s financial sector and address the balance of payment hitches but has boosted foreign reserves and financing to the budget for targeted and temporary spending increases.

Nigeria’s foreign reserves have reached over $37 billion, which represents enough buffers for the CBN to deal with any act of illegal economic behaviour like hoarding, speculation, conversion of local assets among other illicit financial activities.

Gwadabe also added that the OPEC measures on sustainable price stability are commendable as many governments across the world have agreed to oil production adjustment targets and continued collaboration with all their partners, a move that will benefit Nigeria.

He said the CBN has also officially reviewed the naira exchange rat80 to a dollar. Aside devaluing the naira, the apex bank also adopted a unified exchange rate, and pushed the official rate of the naira to N376 to the dollar for International Money Transfer Operators rate to banks; N377 to the dollar for banks’ dollar sale to CBN and pegged CBN’s dollar sales to banks at N378, all aimed at attracting foreign portfolio Investment and strengthening the local currency. The BDC operators are expected to buy dollar from the CBN at N378 per dollar.

Gwadabe said the naira rate review and assurances by the CBN Governor, Godwin Emefiele to foreign investors that want to repatriate their funds from the country are positive for the naira continued recovery.

Gwadabe said ABCON is issuing their reopening guidelines to all its members nationwide to include onboarding on the queuing crowd ticketing management application by all members known as ABCON 360°QSM portal with over 80 per cent members registered nationwide so far.

“We are also updating all regulatory obligations during the lockdown, fumigation of members offices/markets, distribution of second phase of face mask nationwide to our members. There is also the provision of wash hand basins, sanitizers at our distributions centres while members are to explore school fees, mortgage, subscription payments as one of their allowable scopes during post-COVID-19,” he said.

Gwadabe said the impact of the coronavirus pandemic on the naira was not as bad as seen in other African countries’ currencies.

Amid huge capital flow reversal driven by risk-off sentiment, currency rates of African countries show that the South African rand is the worst hit, down 20.6 per cent year-to-date.

This is followed by the Angolan Kwanza which has depreciated by 16.1 per cent, Mauritius Rupee (-8.8 per cent), Nigerian Naira (-6.6 per cent) and Kenyan Shilling (-5.3 per cent) followed in that order. Others include the Tunisian Dinar (-3.8 per cent), Morocco’s Dirham (-2.7 per cent) and the West African Monetary Union’s CFA franc (-2.3 per cent ). Notably, the Egyptian Pound, up 1.3 per cent year-to-date, remains the best performer across the region.

Gwadabe explained that while an adjustment of the Nigerian naira from N360/$ to N385/$ broadly reflects the 6.6 per cent weakness observed in the official market, it must be noted that currency depreciation at the unofficial market is much deeper, currently at N461/$.

But looking ahead, the outlook for the naira is expected to remain relatively strong on the back of growing foreign reserves at over $37 billion, increasing global demand for crude oil, rising commodity prices and rising global trade.

Gwadabe disclosed that ABCON executive council under his leadership will continue to promote transparency and efficient market dealings while commending the CBN management for its progressive policies and achieving stable exchange rate that aligns with its price stability.

According to him, the CBN has been able to create a people-focused central bank, promoting macro-economic objectives such as low inflation and a stable exchange rate, along with a focus on promoting inclusive growth and reducing unemployment in the country.

Gwadabe pointed out that the BDCs remain at the centre of economic development and have the capacity to attract needed capital for the development of the Nigerian economy.

He added that Nigerian BDCs, like their counterparts in other emerging or developing economies, have what it takes to deepen the forex market through the deployment of technology and adhering to global best practices.

Reacting on the development, the Head of Arinvest Research. Abiodun Keripe said the CBN had to comply with the FGN’s directives during the lockdown as such it ran skeletal services all through the period.

According to him, this resulted in chaos and FX scarcity across all segments of the market.

However, he noted that the CBN has become more active in the market post-COVID, aided by the gradual build-up in the external reserves to +$36.6bn as at June 4, 2020, from the lows of +$33.4bn on April 29, 2020.

He said this was supported by the rebound in the crude oil price (+$41/bl.) and debt palliatives from the IMF.

“Although the economy is not out of the woods, the decision of the CBN to quickly adjust the official FX rate to ₦360/$ from the ₦305/$ captures bitter lessons learnt from the 2016 recession. “We remain confident in the CBN’s commitment to ensuring a stable foreign exchange market which is critical for the overall health of the economy.”

Professor of Capital Market at the Nasarawa State University, Keffi, and a former Commissioner for Finance in Imo State, Uche Uwaleke

Said the activities of speculators have been driving the parallel market, thereby causing pressure on the forex market.

“It is what drives the parallel market. The gap between the parallel market and the official window is much. The official rate is 360, I &E window is 389 while the parallel market is 450-455. The gap is very wide and this is not good for the economy. It creates abitrach opportunity

“People are getting a dollar from the official window and selling parallel market; they speculate that dollar may crash and they are buying now as a store of value even when they do not have a need for it. This may cause the value of the dollar to crash which would not augur well for the economy.

He stressed the need for the CBN to ensure that there is liquidity in the forex market by supplying dollar to the forex market.

He pointed out that this would reduce difficulties in accessing forex in the official market.

“If the forex market is not liquid with sufficient dollar, people would resort to the parallel market which is not deep enough and does not have enough supply. When there is pressure on the parallel market, it would lead to a rise on the Exchange rate.

” People are looking for money for the invisible, if there is not sufficient liquidity in the forex market, speculators would resort the parallel market so that they can sell when the price goes up.”

The former president of the Chartered Institute of Banking of Nigeria(CIBN), Prof Joseph Ajibola said: “The forex earnings has a role to play in our forex reserve. The minimum index of any nation’s strength is that the reserve will cover six months of the import base and when reverse is the case, foreign countries see your reserve as insolvent and this will definitely affect the rate

He continued: With the declining oil price in the global market, our reserve declined drastically by N10 billion and this created room for speculators to believe that Exchange rate will depreciate and that is what is driving the exchange rate to 460and above. “This has given indications that the Exchange rate might depreciate officially and speculators go out to buy and that puts pressure to the forex market.

“The CBN has said there is no cause for alarm that the reserve we have can cater to our need and activities are on to generate more forex earnings.

“CBN has been coming out to sell forex to the market to reduce scarcity and that there is no need for any speculations. But there is a limit at which they can support the ex hanged rate policy. We hope that the global market will not be pressured to a level that the earnings from oil in the Nigerian market would be under severe pressure.

He added: “For now, CBN should continue to support a finding of the forex market and continue to push money through the BDC’s and they can not do it if the reserve is sufficiently robust to support the market.”