An unconvincing answer to the Naira question

The Nigerian currency, the Naira, has become the new dog without a tooth to bite during a period when crude oil price is pouncing on the economy with a murderous intention.

Faced with this, you can bet that by the end of this quarter you will probably be looking at N300 to the dollar and about N450 (black market which is where the ‘action’ is) to the pound. You may wish to say rubbish to this forecast! But as at the time I was writing this, the currency is already trading as low as N210.50 to a dollar and N310 to the pounds. At the moment, it is all but impossible to see anything drastic happen. So, be prepared for direct capital control any time soon.

But before I go further, here are two common facts; Nigeria is the only country in the world that operates 4 (four) currency regimes. The government runs the first one for government people which is what they call the official rate. The second one is for the bankers, which is the interbank market. The third market is controlled by the savvy moneychangers called the Bureau de change and the fourth by road side mallams.

Second fact: In November 2014, the Central Bank of Nigeria (CBN) governor, Godwin Emeifele, told the world that “falling exchange reserves were constraining the CBN’s ability to defend the value of the Naira.” Nigeria’s foreign reserve then was $37.2 billion. This was shortly after the Naira was devalued by nearly 10 percent and interest rates raised to record levels. Naira’s mid point was pegged at N168 to the dollar with a plus-minus 5 percent allowance for fluctuation around the mid point. Two months later, last Tuesday to be precise, when the governor met with about 300 of the nation’s business leaders he was confidently talking of defending the Naira with foreign reserves of about N34 bn. How?

What is clear here is that the reserves has dropped remarkably since November when he first sounded the alarmist cord and it will still drop. So, where is this impetus coming from? In any case the market chewed so deeply into the governors comment, which certainly was viewed with panic and the Naira started a gyration unheard of in the market before now. The governor also said in the gathering that “the volatility of the foreign exchange market is being monitored”. But he didn’t say how.

He also talked about misdemeanor in the market orchestrated mostly by bankers and consequent fine of N400 million imposed already on one of the ‘market ‘riggers’.

What all of these suggests is that discussions around manipulation of the currency definitely takes place among CBN officials. The fact that the governor talks about misdemeanor by banks invites questions about what the CBN knows and how much they are ready to divulge about these sinister dealings. I bet the CBN would have as always a very generous interpretation of its current actions.
The governor says fines have been imposed. So what? We’ve had a long history of such fines in the past it didn’t change anything. That again raises the question around the CBN’s innocence in the ‘murder’ of the Naira. Or should I say, in their ability to understand what ails the Naira.

So it’s not just about the fines on the banks. The individual or the trader must be made to pay the price as well with at least criminal charges heaped on them.

Again, let’s see a clear-cut process of conducting a forensic analysis of their trading and their business. The current light-touch approach to regulating the banks and forex traders is no way to run the market.

The apex bank on the other hand should begin now to strengthen its own dealing areas with adequate controls along the lines. I know they will say they have done that already. The truth is that what they have done is not working. There is no evidence to show.

True the CBN have a whole lot of trend watching to do to get off the delusion of doing ‘something for the Naira already’. Why? Because the heart attacks the Naira is experiencing now is not just about the banks or the four Naira markets. Other elements are also tugging at the currency-the Euro zone currency wars, foreign monies moved into the Nigerian markets in search of higher yields are rapidly beating a retreat back home. The US dollar is strengthening as the their economy gets better on the back of weaker oil prices. The more the US economy out performs, the stronger the dollar could get.

Finally, the pressure on the currency will persist as long as the CBN contemplate not acting on all manner of imports that demand foreign exchange. Really a weaker Naira would have been a sweet deal for Nigerian exporters but they have to always contend with a CBN that grants foreign exchange to companies and individuals who import what they produce within the country.