• Monday, May 27, 2024
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BusinessDay

Naira pains exceed gains on weak CBN FX reform

What the Naira need in the new year – Vetiva

It’s all pain and no gain for one of the world’s worst-performing currencies, naira, this year whose 40 percent slump since June has not been enough to restore investor confidence.

The Central Bank of Nigeria (CBN) last June, following President Bola Tinubu’s victory at the polls, allowed the naira trade at a market rate by shifting to a willing buyer-willing seller arrangement after eight years of exchange rate controls.

But the CBN is proving that old habits die hard and has started unduly influencing the rates once again, stifling the market and draining the confidence that built in the early days of the reform.

“The CBN is holding the rate in the FX market and not allowing the liberalised market to function,” a senior banker told BusinessDay.

“Its (the CBN) mismanagement of the FX market is responsible for the gap between the rate in the formal market and the rate in alternative markets,” the senior banker said.

The switch to a “market-reflective” official exchange rate in June, which paved the way for the biggest single-day decline in the naira since 2016, was supposed to open the floodgates of investors who had been sidelined due to the apex bank’s mismanagement of the FX market under former governor Godwin Emefiele.

Read also: Naira fall continues after Cardoso becomes acting CBN governor

It was also expected to force a convergence in the wide gap between the rate dollars were sold at banks (the official rate) and the rate on the streets.

Everything looked to be going according to plan in the first few days of the CBN’s June 14 announcement that it was liberalising the market. But as signs emerged that the central bank was rigging the market again, an already bad situation of low dollar supply became worse and the gap between the official and parallel market rates re-opened.

The gap, which had disappeared by the second day of the liberalisation, has widened to above N200/$. The dearth of dollars combined with the CBN’s manipulation at the formal market pushed demand to the parallel market, allowing the gap to widen.

Liquidity in the formal market has collapsed to a daily average of $99.81 million, down from $295.58 million between May and June 2023 and $318.46 million between January and May 2023, according to data compiled by BusinessDay.

The CBN has excluded banks that sell dollars above N799 per USD from benefitting from its FX sales, in what experts say is an attempt to rig the market price of the naira.

The apex bank also maintains a practice of sending examiners to go around the banks to confirm the rates at which they sell FX, while it continues to place a ban on importers of a list of 43 items from steel pipes to milk from buying dollars at banks.

Experts say the CBN needs to release a single circular that kills all the old circulars that place administrative controls in the market for banks and participants to adhere to.

“We need a single FX market where the ban on the 43 items is lifted and oil companies can sell dollars at the Nigerian Autonomous Foreign Exchange Market (NAFEM) which is the only window recognised by the law,” another senior banking source said. “We should stop using the Investors and Exporters window.”

Read also: Stable naira: International partners ready to help Nigeria; Adeyemo

The CBN seems to be its own worst nightmare and biggest threat to the currency, which has now shot past N1,000 per USD on the streets.

The demand for dollars has jumped as confidence in the naira takes a hit.

The dollar demand is made worse by the negative real interest rate policy of the CBN, which means investors and savers are incentivised to buy dollars.

The negative real return on naira assets is another way the CBN is standing in the way of dollar inflows into the economy.

“With inflation at 26 percent, you cannot offer short-term rates below 28 percent! You are creating more demand for dollars as participants will move their savings and investments to dollars,” a financial markets expert told BusinessDay. “The rates will need to go up initially for investors to bring dollars in before yields begin to go down as dollar supply improves.”

Nigeria has one of the widest gaps globally between savings rate and inflation rate as well as short-term rates and inflation rate, leaving savers and investors with one less reason to either save or invest in naira.

The country’s inflation rate jumped to a more than 18-year high on rising energy and food prices.

Consumer prices climbed 25.8 percent in August, compared with 24.1 percent the previous month, according to data published by the National Bureau of Statistics. That’s the highest level since August 2005. Monthly inflation soared to a 15-year high of 3.2 percent.

The CBN has raised interest rates to combat rising inflation but effective interest rates have remained well below inflation rate.

Fixing the negative real return on investment and halting the slide in the naira are some of the biggest tasks ahead of newly appointed CBN governor, Yemi Cardoso, a former Citibank executive and ally of President Tinubu.

However, the easiest task ahead should be for the new CBN to fully liberalise the foreign exchange market and completely reverse the policies of Emefiele. This way the country can finally begin to reap the full gains of its bold policy reform last June.

“Restoring confidence in the FX market is perhaps the most urgent task before the new CBN Governor,” said Muda Yusuf, CEO of the Centre for Promotion of Private Enterprise.