The Central Bank of Nigeria (CBN) is defending its aggressive intervention in the foreign exchange market, saying it is in a bid to forestall a steeper decline in the naira which has shed more than half its value already, following June 20’s big devaluation.
The apex bank was thrown on the defensive yesterday, after economist, Bismarck Rewane, said the bank’s intervention in the official market has left the naira trading below its economic value in the market.
“When we stress test the naira, we get N302/$, which is conspicuously at variance with the N470 per dollar exchange rate in the parallel market,” Rewane said at an exclusive dialogue on the CBN’s Foreign exchange policy which held in Lagos, yesterday.
The parallel market rate has become the yardstick for determining the true level of the naira, as the once officially referenced interbank market is now at best a shadow of its former self.
Rewane said the CBN’s role in the interbank market was ridding it of substantial independent inflows and undermining efforts for a convergence of rates between the official and parallel markets.
“Reducing the CBN’s intervention in the market is how we can truly reap the dividends of a liberalised market,” Rewane added.
However, Emmanuel Ukeje, the special adviser to Godwin Emefiele, the CBN governor, defended the apex bank’s foreign exchange management, referring to it as a necessary evil to ward off a steeper naira decline.
“I am also an economist and I agree that market allocation is efficient, but we must be weary of an absolute float and allowing the forces of demand and supply determine everything in the foreign exchange market,” Ukeje said.
“This is because we still have acute dollar shortages and if we hands off completely, the naira could tumble 100 percent like the Zambia example,” Ukeje added.
The Zambian kwacha plunged to record levels in 2015 and the Bank of Zambia had to mop-up excess kwacha to put a lid on the rapid decline.
“It tells you there is no absolute float anywhere in the world and this is why we are intervening to ensure the naira does not plunge to levels that it begins to have unintended consequences on the economy,” Ukeje added.
Nigeria bowed to the wish of foreign portfolio investors in June by liberalising the foreign exchange market and the naira has declined 57 percent in value since then, trading at an average of N310/$ in the last three months from N197/$ as at Jan. 2016.
After liberalising the market, the CBN has gone on to be the biggest supplier of dollars in the foreign exchange market as it seeks to defend the naira against all odds.
However, the apex bank is clearly struggling to keep up with dollar demand, given the fall in oil prices, which provide 90 percent of dollar revenue.
“At a time like this,” says Muda Yusuf, the director-general of the Lagos Chamber of Commerce and Industry (LCCI), “you need private foreign capital to fill the supply gap in the foreign exchange market.
“Even at the best of times, when oil prices traded double the price today, the CBN only accounted for 40 per cent of dollar supply. Going from 40 to 90 per cent is certainly unsustainable,” Yusuf added.
External reserves are now below $24 billion, as at October 27, making it somewhat untenable that the CBN can sustain its role in supplying 90 percent of the dollars in the market.
Other dollar avenues are not without constraints as well and it appears despite a series of CBN policies to attract what the governor calls “lukewarm investors,” inflows are still at low levels compared to a peak in 2014.
Sources familiar with the matter say the CBN has made the most of the illiquid foreign exchange market with its system of administering and intervening in it.
Analysts are even beginning to hint at a N500/$ near-term outlook, if the CBN does not promote a credible and transparent market.
The policy of capping the foreign exchange rate through tight management of the dollar – naira peg at near N305/$, also constitutes a disincentive for diaspora remittances, the country’s second largest source of foreign exchange after oil.
“Supply from the International Money Transfer Operators (IMTOs) being sold to the BDC/parallel markets is dwindling because a fixed foreign exchange rate is being offered to Nigerians in the diaspora by the IMTOs,” traders say.
