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Stabilizing the Naira amid calls for devaluation

Calls to devalue the naira have, in recent time, become strident from many Nigerians who, apparently, do not take into consideration the consequences of such action on the nation’s fragile economy.

In simple terms, devaluation means a deliberate downward adjustment in the official exchange rate of a country’s currency against another, or a reduction of the country’s currency value.

Vice President Yemi Osinbajo, last week, called for a market-determined exchange rate, saying the Central Bank of Nigeria‘s dollar demand management strategy has led to a fixed rate, created dual exchange rates, arbitrage opportunities and shut out dollar supply from investors.

Uche Uwaleke, a Professor at the Department of Banking and Finance, Nasarawa State University, Keffi, said the implications of devaluing the naira now were quite scary, adding that the first casualty would be the 2022 Appropriation Bill. “It means the 2022 budget, which is predicated on N410.15 per dollar, is dead on arrival,” he said.

In addition to the several policy measures taken by the Central Bank of Nigeria (CBN), analysts in the financial services sector have suggested more actions to ensure a stable Naira which has been under pressure as a result of rent seeking and speculation in the unregulated market.

Some of the recent policy measures introduced by the CBN to curb this menace and ensure stability in the foreign exchange market include the stopping of dollar sales to the Bureau De Change (BDC) operators due to foreign exchange illegalities.

The CBN also on December 2, 2020, clarified that the International Money Transfer Operators (IMTOs) must ensure that all funds in favour of beneficiaries/recipients in Nigeria be deposited into the agent banks’ correspondent account.

Consequently, agent banks (Deposit Money Banks) in Nigeria will be responsible for final payment to beneficiaries/recipients either in foreign currency cash (USD) or into the beneficiaries’/recipients’ domiciliary account in Nigeria.

Read also; CBN finances Lagos blue line rail project with N110bn

On March 6, 2021 the CBN introduced the Naira-4-dollar scheme as an incentive to boost inflows of diaspora remittances into the country.

Amid other policy measures, Naira pressure reached its peak last month when the dollar was quoted at N570 at the unofficial market. This led to a clampdown on the abokifx, an online platform that collates exchange rates at the unregulated market.

Most analysts believe that raising dollar supply at the official market and market structure reform would help to quell the problem of foreign exchange.

Taiwo Oyedele, head of tax and corporate advisory services at PwC, says Nigeria’s FX inflow is less than what is needed to meet demand including real and speculative demand for legitimate and illegal purposes.

“It is true that FX for illegal activities are being sourced from the parallel market but so are legitimate transactions like importation of raw materials,” he said, advising that the CBN should revisit the list of items prohibited from accessing FX in the official market so that only illegal items should be prohibited.

“It should work with the fiscal authority to impose higher import tariff on items that need to be discouraged from importation, release FX to ease pent-up demand and revamp the FX futures market to remove future demands from the spots market, then allow all legal transactions to access the official market and let market forces determine the exchange rate.

“As a long term solution, address impediments to local production of many items currently being imported and boost export earnings through non-oil sources, including services (ICT, entertainment, professional services etc). The parallel market rate can be ignored when it caters only for illegal activities, frivolities and speculative demands (that’s when it truly becomes the black market rather than an alternative FX window),” Oyedele said.

Uwaleke, who is also the chairman, Chartered Institute of Bankers of Nigeria (CIBN) Abuja Branch, says, the major source of forex supply is crude oil sales which accounts for over 90 percent but unfortunately the CBN has no control over that.

The other sources he said include foreign Investments which are a function of many factors including security, infrastructure, Ease of Doing Business and so on. Again, these factors are exogenous to the CBN.

“So, the major challenge is arising from the defective economic structure exacerbated by import dependency. This, in my view, makes it difficult to completely float the naira which is why the CBN is adopting the managed float system,” Uwaleke said.

In the circumstance, he said, the CBN can only increase supply of forex subject to the size of the country’s external reserves. If foreign reserves grow on account of rising crude oil prices and output, then massive interventions by the CBN becomes necessary.

“However, given that external reserves serve other purposes, the CBN’s intervention power becomes constrained whenever reserves come under threat either from uncertainties in the international crude oil market or from unbridled forex demand,” Uwaleke said.

“I suggest the CBN should ask banks to review monthly limits on Naira debit cards to reduce demand in the parallel market. This can be supported by increasing dollar allocation to banks to fund card transactions,” Ayodeji Ebo, head of retail investment, Chapel Hill Denham, said.

“Additionally, the CBN may also need to review the list of banned items from the official window to reduce the demand at the unofficial market. Overall, there is a need to begin to work on our exports to build sustainable inflow of FX as well as provide confidence to FPIs,” he added.

Razia Khan, managing director and Chief Economist , Africa and Middle East Global Research, Standard Chartered Bank, said an increase in FX supply to the I&E market would help relieve pressure on the NGN, likely helping to contain any further pass – through of FX depreciation into inflation. The onset of the Nigerian harvest season and a pronounced base effect should also help with the deceleration of inflation.

Bismarck Rewane, managing director/Chief Executive Officer of Financial Derivatives Company Limited, said the market structure, the demand and supply side balance are two things that need to be addressed.

“You change the structure because of the intermediaries, that is the BDCs and the price discovery mechanism of the website; those are things that make the market efficient. If an efficient market is going to lead to some illegalities, then that is something that has to be dealt within by the realms of policy; that is regulation and enforcement.

“But monetary policy should focus on what the impact of these changes will be on price level, output, on people’s savings and investment functions. That is where the focus should be,” he said.

Nnamadi Nwizu, Co-Managing Partner, Comercio Partners, believes that Nigeria is due for major reforms. “What you see is that a lot of people seem to move towards dollar-type products and investment options versus Naira investment options because everybody is worried.

“So the question should be how to try and get people to build their confidence once again on the naira. Leaders should ensure that stability. If you look at the Naira between 2008 and 2009, you would see some bit of stability in the currency.

“You did not see people all struggling, looking for dollar type transactions. So, I think the reform is due. But the major thing is that we need to increase dollar receipts into the country and, when that happens, we can ensure that more liquidity comes in and then whatever reform you decide to do will be much more effective than right now,” he reasoned.

Gbolahan Ologunro, senior research analyst, Cordros Securities, said the problem with the structure of the FX market is that it will be difficult for rates in that market to attain some form of stability due to a number of factors.

“Firstly, the CBN has said you need dollars for legitimate needs from commercial banks. But the rules guiding access to dollars from official sources are quite stiff, so the CBN needs to relax some of those rules so that more people who make records to the parallel market can approach their commercial banks,” he advised.

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