Nigeria is finding that it will take more than two months to undo the eight years of damage done to confidence in its foreign exchange market as the bold move to a more flexible exchange rate in June has not started yielding the desired fruits.
Dollar supply remains thin, and that’s piling pressure on the naira, which extended its slump in the black market on Thursday to a new low of 940 per dollar, according to multiple traders who spoke with BusinessDay.
The gap between the official rate and the parallel market rate, which had narrowed in the early days after the naira was floated, has opened up again. With the official rate closing at N781 per dollar on Thursday, the gap is now at N159 per dollar.
Banks don’t have enough dollars to go around and buyers are increasingly turning to the black market, widening the gap between the official exchange rate and the price on the street.
“Liberalising the FX market is a great idea but it has to be followed with consistent monetary and fiscal reforms that would deliver the benefits of a liberalised market,” said Abiola Rasaq, an economist and former head of investor relations at United Bank for Africa.
“Otherwise the system would take the pains of liberalisation in vain and that is definitely not the good intent of the current government in liberalising the system,” Rasaq said.
The Central Bank of Nigeria (CBN) has been criticised for going to sleep after taking the critical first step towards fixing its broken FX market after it allowed demand and supply to determine the exchange rate again after years of pegging the rate.
Read also: Why Naira keeps declining – CBN
The move was however never intended to be the sole solution to Nigeria’s acute dollar shortages, but the critical steps the market expected will follow the shift in policy have not happened.
Importers of a list of blacklisted 43 items continue to be shut out of the official market, forcing demand to the black market, while the apex bank has failed to come clean on the actual level of dollar reserves it holds with independent estimates suggesting it is half of the amount publicly declared.
“It is important that there continues to be price discovery on the official market,” Razia Khan, managing director and chief economist, Africa & Middle East at Standard Chartered Bank, said.
“Equally important is that no autonomous USD supply should be discouraged from the official market,” Khan said.
The lack of transparency around the allocation of foreign exchange has also not helped the naira, according to Ari Aisen, the International Monetary Fund’s mission chief for Nigeria.
“Access to foreign exchange must be transparent with the right macroeconomic policies in place, to reduce volatility,” Aisen said.
He stressed the need to mop up excess naira liquidity to stabilise the currency.
It would however appear the CBN is doing exactly the opposite of mopping up excess naira liquidity, according to Mark Essien, a Nigerian entrepreneur and startup investor.
“Nigeria’s money supply (M3) went from N5.5 trillion to N6.4 trillion between May and June,” Essien said. “The naira is devaluing because the amount of naira entering the economy keeps increasing. The CBN is pumping money in for no reason I can figure out.”
Foreign investors who spoke to BusinessDay said they were watching to see if the CBN would wilt in its push for a flexible exchange rate and revert to the old practice of pegging the rates amid the naira free fall.
The investors are curious to see if the Economist Intelligence Unit (EIU) was right afterall in its prediction that the CBN will go back to a system where they have more control over the exchange rate to try and stop the naira from losing its value much further.
EIU had said in its latest report that a return to the fixed or regulated control exchange rate system was likely because of the CBN’s inexperience in tackling the difficult challenges of obtaining a fair value of the naira without hurting the economy.
“The CBN lacks experience in conducting monetary policy under a float, and the need to control rapidly increasing inflation will become more acute over time,” the EIU analysts said.
Nigerians are taking a beating from several angles, whether from the tripling of petrol prices or the sharp fall of the naira, and are mounting pressure on President Bola Tinubu, who is perhaps as unpopular as his reforms.
Tinubu secured the mandate to lead Nigeria with the lowest number of votes at the February poll, and his appointment of a record number of ministers has left a sour taste in the mouth of many Nigerians who say the government is not sharing in the pain of the reforms being pushed through by Tinubu.
The CBN has however been advised to continue on the path of a flexible exchange rate but is now being urged to follow its actions in June with more that will engender investor confidence.
“The CBN must stay the course now more than ever,” a senior business leader said. “Going back now could prove even more damaging as we seek to rebuild investor confidence after many years of doing the wrong things.”