Markets stagger over CBN’s secrecy on naira devaluation

• Pressure hits external reserves amid sustained forex decline
• Experts predict more hardship as import cost rises
• Seek multiple foreign exchange sources in agric, solid minerals

The Central Bank of Nigeria’s (CBN) handling of the naira devaluation is still shrouded in secrecy, six days after the local currency took about a 5.5 per cent cut on the Secondary Market Intervention Sale (SMIS).

The Guardian had reported on Tuesday that the CBN bowed to pressure, devaluing the troubled naira at the SMIS, a window through which the apex bank intervenes in critical areas of the economy, including importation.

Days after the regulator informed bidders of the decision, there has been no official confirmation, an action that has further upset the market with many operators said to be holding back foreign currencies.

Efforts to have the CBN spokesperson, Isaac Okorafor, confirmed the development failed. As at 12:46 p.m. yesterday, he responded to one of several calls, saying: “Sorry, I am in a meeting. Send an SMS.” He was yet to respond to the message as at press time.

As at yesterday, the circular sent to bidders on Friday had not been uploaded on the CBN’s website. As at 3:00 p.m., the exchange rate last updated on Tuesday still showed N361/$1.

A reliable source said the apex bank “is in a fix, as it is not sure the new exchange rate reflects market reality.” The source suggested that the CBN might be wary of publicly announcing the new rate, unsure whether “it is sustainable.”

The source also suggested that the planned unification is currently facing a political test, which might force the apex bank to “retrieve” and re-evaluate its execution route. It was learnt that vested interests have mounted pressure on the bank to drop any plan of ending the multiple-exchange regime, which many individuals have exploited against the common interest of the country.

CBN Governor Godwin Emefiele had said a few weeks ago that exchange unification was an option his team was considering. This statement, however, has generated controversy.

Reacting to the forex adjustment, Abiodun Keripe, Head of Investment Research at Afrinvest Securities, said the market exchange is between N400/$1 and N410/$1 just as he described the latest devaluation as an entry point to the planned unification.

The dollar, this year, has traded at about N500 at the black market. Many people see this as a true reflection of a floated forex market. What is quite shocking, however, is that the Central Bank is in a fix on how to stabilise the market it regulates and dispel unhealthy speculation.

Experts are worried about the implication of the secrecy and what looks like lack of coordination and direction. Transparency and clear communication, they admitted, are critical to the growth of any market.

While devaluation might help to circumvent dwindling external reserves, it would only bolster the economy if the country expands its base beyond oil and gas. With lip still being paid to diversification, backward integration in critical sectors, and local content development, there might be no respite for the naira.

The risk, economists warned, can only be addressed by developing multiple sources of foreign exchange earnings. This means sincere attention must be paid to growing the agriculture sector and developing solid mineral resources in different parts of the country, aggressively promoting domestic input sourcing, and deepening local capacity.

The experts based their argument on the fact that in view of the import-dependent nature of the Nigerian economy, any upward adjustment of the exchange rate will result in higher inflation rates, at least, in the short-run, necessitating tight monetary policy by the CBN and high interest rate environment.

A unified exchange rate also means an additional burden for the government, which will now adopt the new higher rate for its official transaction. This means dollar-denominated components of government spending will be done at higher costs.

Uche Uwaleke, a professor of Capital Market and Head of the Banking and Finance Department at Nasarawa State University, Keffi, argued that the upward adjustment would further deplete the external reserves and worsen the burden of the country’s external debt service obligations.

According to him, this would make the 2020 budget unrealistic, having been based on an exchange rate of N360 per dollar. It would also threaten the take-off of the recently approved Medium Term Expenditure Framework (MTEF).

Uwaleke admitted, though, that adjustment of the official exchange rate to align with the rate in the autonomous forex market would translate to increased naira inflows into the federation account and eliminate opportunities for currency round tripping and sharp practices.

He insisted that abolishing the official exchange rate and leaving the fate of the naira entirely to market forces portend grave implications for an economy that has a single product (crude oil) as principal source of foreign exchange.

The naira devaluation came weeks after the CBN announced it would end the era of multiple exchange rates in Nigeria.The currency weakened to N380.50 per dollar in off-market trades, from its previous N360.50 close on Monday, traders said. On Tuesday, the naira eased 5.6 per cent on the official market after the CBN sold dollars to lenders at a lower rate, bowing to pressure from international lenders to unify its multiple exchange rates.

Uwaleke insisted that the immediate implication is increased cost of importing petroleum products, which would lead to a hike in the pump price of fuel, especially now when the downstream sector is being deregulated.

“It is important to recognise that the financial market is information-driven. The forex market is highly sensitive and so a cautious approach is required. I think this is what the CBN is pursuing.

“The unification of exchange rates should be gradual, to moderate its effects on the economy. The CBN has to be careful the way it goes about it, so as not to give speculators a field day. I also think the CBN has sent out enough signals that make for clarity in the forex market, including the recent merger of SMIS rates with the I&E window.”

Uwaleke urged government to ensure that the downside risks are mitigated. That is by developing multiple sources of forex outside oil, and promoting the use of domestic products and services by supporting their availability at competitive prices.

“It is important to bear in mind that any further adjusting of the official exchange rate by the CBN to align with the rate in the market has both merits and demerits,” he said.

Prof. Joseph Ajibola, former President of the Chartered Institute of Bankers of Nigeria, said the implication of a deteriorated exchange rate of the naira to the dollar is an instant increase in the cost of living for the citizenry. He said this is because the nation’s economy is still over dependent on imports.

He said: “It is a desirable policy to narrow the gap between the official and black market exchange rates. But it does not happen so easily. What drives the gap is the scarcity of foreign exchange at the official market, which forces users to patronise the black market. Speculators usually take advantage of the situation to hoard foreign exchange and manipulate the rate.”

He, therefore, urged government to encourage export-oriented activities and penalise foreign exchange speculators, stressing: “All stakeholders in Nigeria must promote consumption of more locally produced goods and drive local content to replace imported raw materials. There is a limit to what can be achieved through the fixing of exchange rate by fiat.”

Also, Sheriffdeen Tella, a professor of Economics at Olabisi Onabanjo University in Ogun State, noted that the CBN has liquidity problems because it has not been allowed to manage the reserve and proceed properly.

“The government is bent on servicing debts to be able to get fresh loans, thus depleting the reserve as income comes in. In such a situation, the CBN can succumb to anything. Unifying the exchange rate should be a gradual process and should also be based on results of empirical study. The CBN should be insistent on what is good for the economy based on its research outputs,” Tella said.

He said he did not think the country can operate one exchange rate immediately but it could get there gradually. “Having as many as four or five rates is not good enough. But the bottom line is the shortage of fund with the Central Bank due to serious fall in sale and, consequently, revenue.”

The professor added: “There is the need to ask for a moratorium on our loans and stop borrowing from abroad. There is money to be borrowed in this country which is cheaper.”