When you devalue in the country with the export base as presently constituted, you simply import inflation, export badly needed productivity and employment, exacerbate the inflationary spiral, undermine purchasing power and worsen the misery index of the average Nigerian. And because of the fact that exchange rates in the country only go southwards, it is easy to take a bet on the currency to speculate. If compatriots are wary that the exchange rate could really witness an appreciation, players in the market will be circumspect as they wager their bet.
My take regarding the often voiced view that we should allow the market to determine the value of the naira is that there is nothing close to real market in the real sense of the word. What sort of market is that whereby a dominant supplier, which in this case is the central bank, accounts for as much as 90 per cent of the foreign exchange sold in the market?
In recognition of this shortcoming, the CBN in the past attempted to decentralize the market by encouraging other participants to play in it. At that time the CBN wanted to be just any other participant in the market that will buy and sell foreign currency. But such a move could not fly as supply from other autonomous sources proved insignificant to make such a proposition viable.
At the interactive session with the organized private sector in Lagos, the CBN governor made the point passionately. In fact, Aliko Dangote did make the observation that he has known the CBN governor, Godwin Emefiele, for over twenty-five years now and had never seen him so passionate and emotional about the message he conveyed to participants during the interactive session. The governor sought to assure all concerned that there was no need to panic and that the CBN was ready to meet all legitimate demands for foreign exchange. He pointed out that in the past in this country, the central bank had about only $10 billion in the reserves and still was able to sustain business transactions with the international community. Therefore, there is certainly more headroom to manoeuvre in our present circumstances whereby the reserves have a healthy balance of about $35 billion. The banks were placed on notice not to aid and abet speculative attacks on the naira as those caught doing so will face the music and might in fact lose their licence.
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Probably in answer to the observation of lack of liquidity in the market, the central bank, through a circular titled ‘Special intervention in the Bureau De Change segment of the foreign exchange market’ dated February 3, 2015, improved available liquidity to the market by selling $30,000 to interested members on February 6, 2015. This was after the CBN had, not long ago, increased weekly sale of foreign exchange to the over 2,500 Bureaux De Change from $15,000 to $30,000.
It will be recalled that J.P. Morgan analysts recently placed Nigeria on its negative watch list for a period of between three to five months following its description of the Nigerian foreign exchange and bond markets as illiquid. Some have argued that these recent moves by the CBN are probably in response as it is on record that the governor has openly disagreed with such characterization of the Nigerian market, indicating the resolve of the central bank to contest it.
But it would appear that the oil market, whose crash precipitated the flight to safety and therefore reversed portfolio flows resulting in the crash of the exchange rate, is firming up as the price of oil recently witnessed a rebound. Brent posted its biggest one-day gain in price since 2009, rising over 8 per cent as the price of oil settled at over $50 per barrel. Other developments are the loss in oil rig count in the US, the slashing of substantial amount from investment budgets by major oil producing companies, the expectations that supply from non-OPEC member countries will fall significantly this year, the increase in consumption occasioned by the falling price of oil in the West, and the optimism on the part of OPEC secretary-general, as voiced at a recent conference in London, that the fall in oil price must have bottomed out. All these will seem to support positive sentiments that there is a glimmer of silver lining in the dark cloud of the falling oil price.
There is still some concern that the US, at a daily production level of 9.2 million barrels, has breached a 31-year record and the consideration of the overall sluggish growth of the global economy would seem to put a dampener on these bullish sentiments and might yet delay the much-desired rebound in the price of oil.
Boniface Chizea
