CBN Calming FX Market with Multi-pronged Approach

With the modest appreciation of the naira at the official and parallel markets last week, the consensus is that President Bola Tinubu and his economic team will not only need to sustain the current tempo of reform in the economy but also need to lead by example in a way to send the right signals to currency speculators and other economic saboteurs that the current positive threshold has come to stay, writes Festus Akanbi

After weeks of anxiety, frustrations, and losses at the official and parallel markets of foreign exchange, Nigerians began to heave a sigh of relief last week as rates in both markets began to tumble in response to a cocktail of efforts put in place by the Nigerian authority in the past few weeks.

From Monday last week, it was a roller-coaster at both the Nigerian Autonomous Foreign Exchange Market (NAFEM) and the unofficial market. 

For instance, the exchange rate between the naira and the dollar fell to N869.91/$1 on Tuesday at the official market. This represents an N60.89 loss or a 6.99% decline in the local currency compared to the N809.02 it closed the week on Monday.

Still on Monday, at the Bureau de Change level, people purchased one US dollar for N1180 and sold it for N1170, while on Tuesday, the rate was between N990 and N1005. 

On Wednesday, November 8, a dollar was exchanged for N874.71 while forex traders reportedly bought the US dollar for N1,097 at bureaux de change (BDC), representing a wide spread of N352.50/$1.

On Saturday, a dollar was traded at N1,140 at unofficial market.

Payment of Matured Forwards to Creditors

Financial industry watchers said the relief in the FX market was coming against the backdrop of the recent commencement of the payment of outstanding matured FX forwards owed to various creditors by the CBN.

The banks are Citi Bank, Stanbic IBTC, and Standard Chartered Bank. The amount of overdue forward payments is estimated at $6.7 billion, according to the Minister of Finance, Wale Edun.

The settlement of matured foreign exchange forwards, according to the Association of Corporate Treasurers of Nigeria, is a significant step in promoting stability and confidence in Nigeria’s foreign exchange market.

A statement signed by the association president, Adeyinka Ogunnubi, reads, “We, at ACTN, believe that the timely settlement of matured FX forwards is crucial for our members and the broader business community. It allows our corporate treasurers to efficiently manage their foreign exchange risks and plan for their financial obligations.

Presidency: Shocks Await 

Currency Speculators

In its reaction to the marginal increase in the value of the Naira, the presidency has assured that the policies being worked on by the President Bola Tinubu administration will further strengthen the Naira that it will soon exchange for N500 to one United States Dollar.

Special Adviser to the President on Economic Matters, Dr Tope Fasua, who disclosed this at the “Cowries to Cash” lecture and lunch in Abuja last week, noted that the fall in the value of the currency of any country was a sign of conquest.

He warned Nigerians hoarding foreign currencies with the hope that the local currency will continue to fall to be prepared for the shock of their lives going by the current policies of the federal government.

Fasua, who represented Vice President Kashim Shettima at the event said: “For those who are speculating and praying and wishing that the currency would become nonsense, I believe that policies being rolled out by the Central Bank and the government that I serve, led by the President, will shock some of them.

“Some people thought the naira would continue to lose value. Of course, we can already see what’s going on, and who knows, maybe the naira will strengthen even further to maybe something 500 or 600. I’m beginning to see some of those,” he asserted.

The currency hit a record low of N1,300 per dollar on the black market, a month after it crossed the N1,000 mark, amid thin trading volumes on the parallel market and dollar shortages on the official market.

However, responding to the claim that the Federal Government is putting in place measures to achieve the exchange rate target of N500-N600/$1 while reorganising the banking sector, various private sector institutions and financial experts have expressed divergent views over the feasibility and the benefits of the goals.

The Nigeria Employers Consultative Association, NECA, and economy experts commended the idea but urged the working policy plans should be disclosed and made clear.

They added that the government should focus on local production, address the nation’s propensity to import, and make the fiscal and monetary policy authorities work in sync among other things, before dreaming of a lower exchange rate.   

NECA’s Director-General, Mr Adewale-Smatt Oyerinde, urged the government to deepen engagement with organised businesses with the view of building greater consensus and support for the ongoing reforms.

Oyerinde stated: “We note the plan by the Government to shore up the value of the Naira to between N500 and N600 to a Dollar in 2024. This plan is quite commendable and ambitious.

“While we commend the plan, it is instructive to note that this will require a deliberate and focused plan of action to address the shortfall in Dollar supply”.

A Doubled-pronged Approach

Perhaps, a more practical reason for the current appreciation of the Naira was the one provided by the ABCON, which described the the double-edged sword of dollar liquidity injection and the mopping up of the naira through interest rate hikes as the major reason for the improvement in the value of the local currency.

According to a statement by the association’s president, Aminu Gwadabe, “The development stems from the ‘double-edged sword dollar liquidity injection and the mopping up of the naira through interest rate hikes. 

“What is happening in the market and the continued naira rebounds is the manifestation of the Central Bank of Nigeria’s double-edged sword measures of dollar liquidity injection and naira mopping through the instrumentality of interest rate hikes. It is a good development as it is a greater risk to speculate, hoard, and substitute naira for other currencies.” 

Meanwhile, ABCON in its solidarity with the CBN’s efforts said BDC operators are ready to rally around the CBN to sustain the recent gains of the country’s currency.

The association president in a separate statement last week said, “It is a good development as it is (now) a great risk to speculate, hoard, and substitute naira for other currencies.

“As we continue to observe developments, there is the need for caution in attacking the naira, as it all appears that the CBN has got the arsenal and the logic to continue to enshrine the success recorded.”

Long-term Strategy

However, analysts believe the current threshold in the FX market can only be sustained with a long-term strategy that includes the immediate de-dollarisation of the economy, the extinguishing of mature foreign obligations, and the urgent need for the CBN to deal transparently with participating banks at the I&E Window (now NAFEM).

The Founder and Chief Consultant of B. Adedipe Associates Limited (BAA Consult), Dr. Biodun Adedipe insisted that there is no shortcut to Naira exchange rate stability, saying there is a need to rely on a focused combination of fiscal, monetary, and trade policies.

According to him, “CBN should deal transparently with participating banks at the I&E Window. De-dollarise the economy by declaring as illegal any local transactions in US dollars (sale of assets, rent/leases, and other services, including school fees and medical bills) and ensure that government agencies stop charging local operators and entities in US dollars (quite common in the maritime sector).” 

On his part, Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE). Dr Muda Yusuf said there is no silver bullet in the treatment of the current fate of the naira. He explained that fundamentals are weak because the government can’t make FX available.

Yusuf said the CBN, which is the only supplier of fx for now is weak, saying the situation will remain the same until others can bring additional inflow. “These can be fresh flow from oil sales or IMF support which is also a possibility because other measures had been exhausted by the immediate management of the apex bank.”

As Nigerians await the crystallisation of the various policies aimed at calming the foreign exchange market and improving the chances of Nigeria in international trade, analysts said the government will need to lead by example in all its dealings.