Continued naira pressure beckons on fiscal monetary authorities’ collaboration

The pressure on the Nigerian naira has remained unabated, beckoning on the collaboration of the fiscal and monetary authorities to save it.

Naira has depreciated to a peak of N430 per dollar at the official market, known as Investors and exporters (I&E) forex window, and N710/$ at the parallel market, popularly called black market.

Demand pressure and limited foreign currency inflows triggered depreciation of the Naira, widening exchange rate premium, according to the FSDH macroeconomic report.

Other factors responsible for naira free fall include stronger dollar, import demand, oil theft, fuel subsidies, currency speculation, record high money supply and weak productivity.

The Central Bank of Nigeria (CBN), whose objective is to ensure monetary and price stability; issue legal tender currency in Nigeria; and maintain external reserves to safeguard the international value of the legal tender currency, among others, has applied all measures necessary including interventions in critical sectors of the economy, to ensure stability of the naira.

In the face of rising demand for foreign exchange for both goods and services by Nigerians, the Central Bank of Nigeria (CBN) has advised Nigerians to resist the urge of succumbing to the speculative activities of some players in the foreign exchange market.

Osita Nwanisobi, director, corporate communications at the CBN, said the CBN remains committed to resolving the foreign exchange (FX) issues confronting the nation and as such has been working to manage both the demand and supply side challenges.

While admitting that there was huge demand pressure for foreign exchange to meet the needs of manufacturers as well as those for the payment of tuition, medical fees and other invisibles, Nwanisobi said the Bank was concerned about the international value of the naira, adding that the monetary authority was strategizing to help Nigeria earn more stable and sustainable inflows of foreign exchange in the face of dwindling inflows from the oil sector.

Specifically, he noted that recent initiatives undertaken by the Bank such as the RT200 FX Programme and the Naira4Dollar rebate scheme had helped to increase foreign exchange inflow to the country.

According to him, the Bank’s records showed that foreign exchange inflow through the RT200 FX Programme in the first and second quarters of 2022 increased significantly to about US$600 million as at June 2022. Similarly, he disclosed that the Naira4Dollar incentive also increased the volume of Diaspora remittances during the first half of the year.

He added that the interventions such as 100 for 100 Policy on Production and Productivity, Anchor Borrowers’ Programme (ABP) and the Non-Oil Export Stimulation Facility (NESF), among others, were also geared towards diversifying the economy, enhancing inflow of foreign exchange, stimulating production and reducing foreign exchange demand pressure.

Nwanisobi therefore said that the Bank would continue to make deliberate effort in the foreign exchange sector to avert further downward slide in the value of the naira, which he observed is fuelled by speculative tendencies.

Reiterating an earlier position of the CBN Governor, Godwin Emefiele, he urged Nigerians to play their role by adjusting their consumption patterns, looking inwards and finding innovative solutions to the country’s challenges.

He submitted that monetary policy alone could not bear all the burden of the expected adjustments needed to manage the challenges around Nigeria’s foreign exchange and admonished that: “It’s our collective duty as Nigerians to shore up the value of the Naira”.

Godwin Emefiele, CBN governor, had in March 2017 reiterated the need for the country’s monetary and fiscal authorities to collaborate and harmonize standpoints so as to develop the economy rapidly.

“We recognize some CBN interventions as they show signs of supporting foreign exchange inflows, especially the “Race to US$200 billion in FX Repatriation (RT200 FX Programme)” initiative. But then, the outcomes are far-fetched from matching the demand for foreign exchange. This is because there is still no clear-cut and effective footprint to drive output expansion across sectors for exports”, the report stated.

According to Ayodele Akinwunmi, relationship manager, the best way to resolve the foreign exchange crisis is through the increased supply of FX. This can be achieved through increased export of goods and services.

“It is also about how do we move away from exporting only crude oil to refined oil and how do we do that? There are a lot of modular refineries that are idle today. We need to ensure those things are in place. There is a need to look at other government refineries, rather than doing turnaround maintenance, sell them to private investors, let them do the maintenance, increase production and export. It will help increase local demand and reduce demand for FX,” he said.

Read also: Naira appreciates across markets after CBN assures of stability

In terms of non-oil export, he said there is a need to give incentives to manufacturers of the non-oil sector. We have competitive advantage in agriculture but insecurity has not allowed us to extract maximum value in that area. These are the things we need to do to earn more dollars.

The CBN had introduced various demand and supply measures to boost foreign exchange inflows and ensure the stability of the Naira.

Some of the measures are, removal of third parties from buying of foreign exchange routed through Form ‘M’, receiving of Diaspora remittances inflows in foreign currency through the designated bank of their choice, introduction of Naira 4 dollar scheme, discontinuation of dollar sales to Bureau De Change (BDC) operators and the most recent one – the RT200, among others.

The persistent depreciation of the Naira is seen as not having an immediate solution after all the foreign exchange measures introduced by the monetary authority to stem the tide, according to Nigerian analysts.

“I don’t think there are things anybody can do in the immediate to stop the Naira depreciation because our balance of trade and balance of payment are negative. Nigeria is currently importing more than it is exporting”, said Johnson Chukwu, managing director/CEO Cowry Asset Management Limited, in July 18, 2022.

Nigeria’s economic outlook faces significant risks from the covid-19 pandemic trajectory, oil price uncertainty, and security challenges, the International Monetary Fund (IMF) said in February 2022.

The Fund two months ago expressed concern over the deteriorating level of security conditions in Nigeria, saying that it was contributing to the subdued Gross Domestic Product (GDP) figures in the country.

“Regarding the external sector, the current account deficit narrowed significantly in 2021 helped by import compression and higher net oil balance. However, the improving trade balance, which has continued so far in 2022, is having a limited impact on forex strains with the exchange rate premiums in the parallel market staying in the 35-40 percent range since October 2021,” the IMF said.

According to the fund, GDP growth is projected at 3.4 percent (y/y) in 2022 while inflation is expected to remain elevated. The fiscal deficit of the Consolidated Government is expected to remain high at 6.1 percent of GDP due in great measure to costly petrol subsidies and limited tax revenue collections.

Taiwo Oyedele, head of tax and corporate advisory services at PwC, explained that the 43 items prohibited from accessing foreign exchange can be imported but cannot access foreign exchange.

He was concerned that the items that can have access to foreign exchange get 30 percent from the official market while 70 percent is sourced from the black market.

Oyedele called on the collaboration of the Monetary and fiscal authorities to address the Naira depreciation.

He said the government should address the crude oil theft, which is one of the contributing factors to Naira depreciation.

Chizor Malize, managing director/chief executive officer of Financial Institutions Training Centre (FITC), said Nigeria is already in a Naira crisis and that there is need to move from consumerism to production.

On what will stop oil theft in the Niger Delta region, Chukwu said, oil theft in the region has remained unabated because they are not getting appreciable value from the authorities. Government should develop the area with good infrastructure and education to make life worth living for them.”

A look at some of the actions taken by the CBN to ensure stable exchange rate and increased FX inflow showed that The Naira was devalued in November 2014 from about 160 to 176 to the US$ under the leadership of Godwin Emefiele, CBN governor.

A timeline of interventions

In 2014 employed the Retail Dutch Auction System (rDAS) as the mechanism for foreign exchange management.

On February 18, 2015, the Window was closed and all eligible demands for foreign exchange moved to the inter-bank segment.

On May 21, 2015, the CBN issued a circular saying that pricing of goods and services must only be in naira.

In 2015, measures to exclude 41 items from the list of goods valid for foreign exchange at the official window and limited the usage of Naira-denominated cards overseas to US$300.0 per person, per day.

In 2019, the CBN abolished commission on retail foreign exchange transactions on invisible services, such as business travel allowance (BTA), personal travel allowance (PTA), medical and school fees. The Bank also adjusted downward the selling rate of foreign exchange to Bureaux de Change (BDC) operators and increased the frequency of its interventions in other windows, to ease access and availability of foreign exchange to end-users.

On April 27, 2018, signed a 3-year bilateral currency swap agreement of US$2.5 billion, equivalent to ¥15.0 billion or N720.0 billion with the Peoples Bank of China (PBoC), as part of an effort to reduce foreign exchange demand pressure and facilitate investment.

The CBN in September 2020 mandated lenders to place Post-No-Debit status on the accounts of entities that participate in the parallel market.

On December 1, 2020, the CBN introduced new rules that allow beneficiaries of diaspora remittance and transfers into domiciliary accounts to receive their money in foreign currency.

In March 2021 the CBN introduced the naira 4 dollar scheme, which is the payment of N5 for every one dollar received by all recipients of diaspora remittances through its licensed International Money Transfer Operators (IMTOs).

On July 27, 2021, the CBN stopped dollar sales to Bureau De Change Operators (BDCs).

In February 2022, the CBN unveiled the RT200 FX Programme”, which targets $200 billion in FX repatriation.

Stronger dollar

The U.S dollar has in the past one year become stronger than other global currencies, following rising interest rates to tame inflation.

The Federal Reserve Officials on Wednesday unanimously agreed to raise their benchmark federal-funds rate to a range between 2.25 percent and 2.5 percent.

On Thursday, the US economy shrank 0.2 per cent in the June quarter, or 0.9 per cent on an annualised basis. The US economy fell into a technical recession in the second quarter, with data published by the commerce department on Thursday showing a contraction in the second three months of the year, Financial Times reports.

According to World Street Journal (WSJ), a stronger U.S. dollar draws investors away from emerging markets, and governments that issue debt in foreign currencies face greater risks.

What this means for Nigeria is that its currency, the Naira is said to be weaker compared with the U.S. dollar, said analysts.

Gafar Bashiru, senior associate, Parthian Partners, said a stronger dollar will lead to a weaker Naira for the following reasons:

Import cost: As an import dependent nation, we will have to spend more Naira to buy the same volume of imported goods, thus worsening the Naira-Dollar exchange rate.

Capital outflow: As investors seek safety in the greenback and US treasuries, foreign investors’ exit will deplete our external reserve, and thus our ability to defend the Naira.

Speculation: As Nigerians anticipate devaluation from these factors, we would see increased speculative demand for dollars in an attempt to hedge against devaluation. An expectation of devaluation will thus lead to further devaluation.