Naira nears N350 “fair value” as it hits N400 in black market

… But analysts say battle not yet over

The exchange rate of the naira in the unofficial black market hit a new seven-month high of N400 to the US$ yesterday, N50 above N350 exchange rate which sources in the Central Bank of Nigeria (CBN) claim is the fair value of the naira.

The unofficial exchange rate of the naira has seen a steep appreciation since February 20, when the CBN took the decision to raise its interventions in the official foreign exchange window with dollars for school fees and other invisibles.

The naira has gained N120 or 23.1 percent since the intervention began after falling to a low of N520 per dollar in the parallel market. Godwin Emefiele, Governor of the CBN, has promised to sustain the intervention, warning that speculators against the naira will have their fingers burnt.
“The CBN is on the direction to converge rates, as our foreign exchange policy programmes are on course,”  Emefiele said at a news conference in Abuja on Tuesday, following the two-day meeting of its Monetary Policy Committee.

“Those on the side-lines are on the wrong side of the bet, we are strongly very optimistic that rates will converge further,” Emefiele said.

However, traders and analysts in the financial services sector are uncertain about the sustainability of the CBN’s intervention efforts, visa-avis naira appreciation.

Ken Ukaoha, president, National Association of Nigerian Traders (NANTs) told BusinessDay last night, that though the new foreign exchange policy is a  step in the right direction, it is too early to shout “uhuru.”

Razia Khan, head of African research at Standard Chartered Bank, London, said the battle is not over, warning that Nigeria’s current foreign exchange regime leaves it vulnerable to any sharp decline in oil earnings.

“Such a situation would put pressure on foreign reserves, and maybe bring about a more severe dollar shortage, which would be negative for the economy”, Khan said in an emailed response.

She advised that given Nigeria’s dependence on a single commodity, it would do better to mitigate its external risk by adopting a more flexible currency regime.  A floating foreign exchange rate would serve as a better buffer, protecting both foreign reserves and the underlying economy from the full impact of any negative development with oil earnings. The exchange rate would have an ability to absorb at least a part of the shock.

“Nigeria needs a floating exchange rate buffer.  It does not have one in place, and this is why the real economy and foreign reserves have borne the brunt of past crises.  It needs to seek that improved balance between protecting growth and protecting the exchange rate. It cannot and should not protect the foreign exchange rate at the expense of growth.  Middle of the road solutions work better than extremes.  Nigeria’s fixed exchange rate represents an extreme”, Khan added.

But Charlie Robertson, Global Chief Economist, Renaissance Capital, says that increased dollar liquidity into the parallel market should help lift growth.  The cause of this is rising oil prices (thanks to OPEC) and rising oil production (thanks to the efforts of the vice-president in negotiating with the Avengers), which have increased dollar export value.

“So, instead of Nigeria seeing its GDP decline again (as happened in 2016), the economy should show some growth in 2017.  More helpful still, would be more flexibility in the interbank foreign exchange market.  That would help boost investment and long-term growth”, Robertson said.

Ayodeji  Ebo, managing director, Afrinvest Securities limited, also admits that the CBN’s move to improve foreign exchange liquidity in the economy will lower the cost of imported inputs as well as cost of production for manufacturing companies that rely on imported input.

“The experience in the past was that firms whose input products qualify for the foreign exchange, hardly have access to it in the interbank market. These companies were forced to patronise the parallel market, which had significant variance to the interbank. “We also expect firms will be able to access foreign exchange to meet their dollar obligation in due time”.

Ebo also sees a situation where the convergence between the interbank and parallel market will reduce round tripping and other unethical practices, hence eliminate artificial demand in the foreign exchange market.

“For the banks, availability of forex will reduce Non-Performing Loans (NPLs) as more companies will have access to dollars, to settle their obligation as at when due. With the 20 percent margin introduced by the CBN on foreign exchange sale for Personal Travel Allowance (PTA), Business Travel Allowance (BTA), School Fees and Medical Allowance, banks’ income from dollar sale would improve significantly, due to the pent up demand and improved activity.

“Lastly, we expect to see improved trade, due to the availability of foreign exchange. With over N70 appreciation at the parallel market, as well as availability of dollars at the interbank, imported goods would now be cheaper, hence boosting demand for goods and services”, Ebo added.

 

Hope Moses-Ashike