When CBN Redesigns Nairato Halt Slide

Amidst the shock and confusion trailing the free fall of the naira in the foreign exchange market, the Central Bank of Nigeria is set to introduce new naira notes as other stakeholders in the nation’s foreign exchange market continue to explore means of halting its slide and fortify the economy against the impact of the current global challenges, reports Festus Akanbi

For most of last week, the exchange rate between the naira and the US dollar closed at N441.67/$1 at the Investors and Exporters window, where forex is traded officially.

On the other hand, the exchange rate between the naira and the US dollar fell at the black market to trade at an average of N760/$1 on Wednesday, October 26, 2022.

CBN Redesigns Naira

Therefore, as the authorities continue to battle the twin problem of volatility in the value of the naira and the rising volume of cash outside the banking system, the Central Bank of Nigeria (CBN) last Wednesday announced a plan to introduce new naira notes beginning from November 15, this year.

The CBN Governor, Godwin Emefiele had lamented that about 85 per cent of the money in circulation is outside the banking system, a development some analysts listed as one of the causes of the current pressure on the naira.

He lamented that out of N3.23 trillion in circulation over 85 per cent of the money, totalling N2.73 trillion is outside the banking system.

The new notes will be in form of N200, N500 and N1000 and the old notes will cease to be legal tender as of January 31, 2023.

What Financial Analysts Say

However, financial analysts differed on whether the new naira notes can affect the economy or not.

In his opinion, a Professor of Capital Market Studies and the Chairman of the Chartered Institute of Bankers of Nigeria, Abuja Chapter, Prof. Uche Uwaleke believed the decision will curb black money and corruption.

He said, “Although the measure does not amount to demonetisation of big currency notes often carried out by central banks to curb black money and corruption, it will go a long way in ensuring that a lot of naira notes circulating outside the banks are crowded in.

“I expect that the Financial Intelligence Unit will be on the watch out for huge deposits as a way of monitoring illegitimate transactions.

His view was corroborated by a Professor of Economics at the University of Abuja, Prof Oyinlola Olaniyi, who maintained that the decision would be a major shock to people who have hoarded stolen funds that they can’t account for.

Olaniyi said: “If you have old notes, take it to the bank and if have stolen money and you have hoarded it in your house knowing that if you bring it out you will be questioned, then that is exactly one of the things governments want to achieve.

However, the Chief Executive Officer of Economic Associates, Dr. Ayo Teriba did not share the CBN’s optimism that the new currency would have effects on the economy.

Disagreeing with the apex bank governor, Teriba said contrary to Emefiele’s claim about the decision improving the naira, the redesigning of naira notes will not add to the value of the currency which trades around N757 per dollar at the black market.

He said: “There is no reason why it should have any effect. Currencies get withdrawn from circulation and are replaced with new ones routinely. So, if you want to change the design and withdraw the existing one from circulation, it is not too far from withdrawing worn-out currencies and replacing them with newly printed notes.

“The value of the notes will not change, the colour will change, the picture on it may change but all those things are immaterial from an economic point of view.”

Volatility in Forex Market

Meanwhile, some market watchers said the current situation in the nation’s foreign exchange market which is already worsening the fate of the naira has continued to heighten fears among traders and investors.

“It is a dangerous scenario which makes it risky to keep money in naira these days as no one knows the value the currency will attract the next day,” a foreign exchange trader in Lagos told THISDAY.

Some observers wondered why the local currency has defied a harvest of interventions of the CBN, which it put in place from time to time, to halt the slide in the naira value.

However, when contacted, the President of the Association of Bureau de Change Operators of Nigeria (ABCON), Mr. Aminu Gwadabe, said the naira has not been able to respond to some of the previous regulatory interventions because the attention of the apex bank was mainly focused on the wholesale end of the market, leaving the retail end, which is the largest stranded.

He said: “Unfortunately most of the policies are only geared towards addressing the needs in the wholesale market while ignoring the critical retail end of the market,” explaining that the critical retail end of the market is where the pressure is high and has a spiralling impact in the exchange rate depreciation.

On other options available to the regulator, Gwadabe said: “Given the above, the CBN needs to as a matter of urgency look into liquidity supply to the critical retail market by making BDCs part of the ecosystem.”

This, he said, can be achieved by breaking the monopoly of big players by reforming the business model of the BDCs and making them participate in the new payment space.

According to him, “The naira is among the worst performing currency against the dollars in the world as a result of our trade payments imbalances and dwindling reserves.”

He, therefore, called for a concerted effort to address supply-side fundamentals.

Given the paucity of dollars in the kitty, and the uninspiring performance of the oil sector as a revenue earner, Gwadabe said Nigeria can begin to bank on remittances while calling for the break of the gap between the official and parallel market rates.

Falling Reserves

An analysis of the movement of the foreign reserves on the CBN website on Wednesday, October 26, 2022, put the figure at $38billion as against $40.50billion at the end of last year.

 To a greater extent, the value of a country’s external reserves determines the strength of its local currency – the more dollars in the reserves, the better chance to effectively defend and preserve the value of the naira.

Rising Importation

Analysts pointed out that Nigeria’s unfavourable balance of payments which manifested in the rising import bill while export proceeds remain low should be blamed for the current dollar scarcity and the corresponding pressure on the naira.

One of the financial experts who believed it is the responsibility of the federal government to make a difference is the Relationship Manager of Corporate Banking at FSDH Merchant Bank, Ayodele Akinwunmi.

He was quoted as saying that the direction of the naira in the short term will largely depend on the ability of the country to export both oil and non-oil goods and services, attract foreign direct investments (which can happen through the provision adequate security of lives and property in the country) and the country’s ability to create an enabling environment that will ensure that it produces goods that it has a competitive advantage over other countries to reduce imports.”

According to the latest Economic Complexity Report, the top exports of Nigeria are crude petroleum ($30 billion), petroleum gas ($5.89 billion), scrap vessels ($1.29 billion), Special purpose ships ($775million), and refined petroleum ($613 million), exporting mostly to India ($6.27billion), Spain ($4.8 billion), China ($2.54 billion), Netherlands ($2.24 billion), and South Africa ($2.17 billion).

On the other hand, the top imports of Nigeria are refined petroleum ($7.75 billion), cars ($3.03 billion), wheat ($2.15 billion), packaged medicaments ($1.38 billion), and telephones ($771million), importing mostly from China ($17.4 billion), Netherland ($4.58 billion), United States ($4.49 billion), India ($3.46 billion), and Belgium ($1.99 billion).

Financial analysts who said the naira depreciation didn’t come as a surprise said narratives from within and from outside the country have zeroed the minds of Nigerians to a likely depreciation of the currency. They maintained that although the apex bank doesn’t seem to have the courage to announce an official devaluation, the problem of acute scarcity of foreign exchange in the face of the crisis in the oil export has made a devaluation of the currency inevitable.

For instance, the Bank of America had projected that the official exchange rate could likely be devalued to N520/$ in 2023 because it is well above fair value.

At the recent presentation of the 2023 budget by President Muhammadu Buhari, the exchange rate was benchmarked at N435.57 per US dollar even as the Minister of Finance, Zainab Ahmed, cited the multiple exchange rate as a challenge the government needs to deal with.

In September, Ahmed mentioned in an interview that the exchange rate would likely weaken. “It will happen with time,” she said, without giving any timeline.

It is hoped the various positions of stakeholders in the Nigerian economy will be urgently harmonised to halt the current slide in the naira value.