Nigeria declares war against speculators! The CBN intensifies action against speculators! FG moves against speculators! Nigeria warns speculators over betting against the naira!
These are the screaming headlines in various national dailies!
No government goes to war with speculators and comes out victorious.
Enter the Bank of England; sterling entered the ERM at an overvalued rate in the 90’s. Speculators smelt blood by placing huge bets against the pound. Rather than eat a humble pie, the BOE decided to take on the so-called “masters of the universe” by increasing interest rates and buying billions of pounds to shore up its value. As a result, it lost USD1 billion in one day! In total, the bank lost GBP3.3 billion! The second-oldest central bank in the world, the Bank of England, went to war with speculators and lost! The David vs. Goliath principle wasn’t going to work. Goliath won!
Enter Thailand, Thailand in the 1990s had a successful export-based economy. It made huge amounts from its exports. China had other plans; it naturally had a cheap labour force by virtue of its huge and pauperized labour force and a devalued currency. These two factors made China a low-cost producer for the entire world. The Thai Baht was anchored to a basket of currencies, which made the Baht overvalued. Thailand, as a result, could no longer compete. China had swallowed its mojo. The only way to redress this imbalance was to abandon the peg and devalue its currency. Speculators smelled blood and attacked the currency. Rather than take its medicine, the government decided to go to war by emptying its reserves and raising interest rates. It was too late. Thailand lost; the speculators smiled all the way to their banks.
The world FX market is huge, dwarfing the equities and interest rate markets. On a daily basis, the world’s major currency (USD, GBP, Euro, and Yen) turnover is 6 trillion dollars, of which about 90 percent is speculation. Take a deep breath and think about this carefully!
On the local scene, the Nigerian government has made a rod for its own back by printing trillions of naira. These trillions, unfortunately, are now going to be used to fight the government. Most of these funds will be used to buy the dollar as the naira loses its store-of-value function and as expectations of a further fall in the naira increase.
Nigeria, on the other hand, has at most USD 30 billion in reserves. It does not take a rocket scientist to know what will happen to such reserves when you fight someone more powerful than you.
To the government and policymakers in Nigeria, it is a win-win situation! My advice to the government is to stop throwing borrowed dollars and dollar reserves into fire in the quest to shore up the value of the naira.
It is an exercise that will end in tears! Your best bet is to use the FX that comes your way to address structural rigidities within the system. Address supply chain issues, security issues, corruption issues, farming, and other industrial issues with honesty!
Speculators and asset managers are not silly; as they begin to see changes in the fundamental climate of the country, they will switch their bets to “long naira, short dollars.”
Niyi Omidire is a macroeconomist and a licensed commodity trading advisor at [email protected].
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