Analysts and market watchers are opining that only a single foreign exchange rate will be capable of bringing the endless struggles of Nigeria’s naira to rest.
According to them, as long as there are different foreign exchange prices or rates, and the market continues to remain fragmented, we might not see an end to the foreign exchange struggles.
As an even worse and unintended consequence, the lack of calm in the foreign exchange market is leading investors to indefinitely postpone both their short and long term investment decisions, until things become much clearer.
Nigeria’s economic downturn, which has continued into this year, but aggravated last year at the start of the oil price collapse, has been made worse by knee-jerk policy reactions to the situation by the Apex bank. At the turn of the year, it was believed that calm would be restored to the economy after the election melodrama was over. But that has not been the case so far.
In a new twist, the CBN extended its $300 daily spending limit from just cash/ATM withdrawals to online transactions. This means that Nigerian consumers will not be able to buy their favourite items online if the price is above $300. This also would have the implication that payment of school fees, and other bills payable online would be declined by the banks (according to the banks, this would be reversed soon).
The uncertainty around forex regulations has led to widely varying and extreme effects in the economy. In the first quarter of the year, Nigerian deposit money banks were decrying a lack of foreign currency in their vaults, and hence were not meeting the forex demand in the economy. Fast forward to the 3rd quarter, they now have their vaults full of dollars, and have started rejecting dollar cash deposits from customers.
This uncertainty is hurting the economy, and pushing away investors who cannot make a decision under the prevailing circumstances.
“In a market economy, there is a price for something. And if the official price is different from the parallel market price for that thing, then there has to be some action that will equalize those markets. And I believe that when investors see a unified price, they will feel more comfortable that that is the true price of that object, which is the exchange rate in this case”, said Donna Oosthuyse, Director of capital markets at the Johannesburg Stock Exchange.
“If there are short-term considerations, if you expect that there is going to be a devaluation, then you might expect that you can get a better price later after the devaluation. So as an investor, you just wait”, she said, in a response to questions.
Currency speculation is natural market response to arbitrage opportunities, wherever they exist, regardless of the country in question. Nigeria’s case is no exception, because fundamentally, markets are fragmented and different prices prevail in the different markets.
As a growing economy, the appeal to foreign investors looking to invest in Nigeria still remain, but issues such as forex liquidity must be put to rest, in order to assure investors that will be able to exit comfortably when they want to.
Edozie Ifebi
