Interesting dimensions of Nigeria’s currency war

People are skeptical. They are confused whether there is surplus dollars in the market or not. To some privileged few in the currency market, this doubt shouldn’t arise at all. After all, the supply of a currency which depreciated to N500 per dollar barely two months ago (early February), and now sells for N360/$ can be said to have improved. This is going by the laws of Demand and Supply. When more quantities of any particular commodity are supplied, its price crashes and vice versa.

The divergent positions became more interesting as principal actors continue to thrill the general public with yet, different episodes on daily basis.

Just last week, the Economic and Financial Crimes Commission (EFCC), on Wednesday in particular arrested two directors of the Central Bank of Nigeria (CBN). They were alleged to have carried out forex manipulation and committed economic sabotage. The EFCC detectives said the houses of two directors earlier arrested (the director of procurement and a special adviser to the Central Bank Governor Godwin Emefiele) had been searched while incriminating evidence had been recovered.

The agency believes that it was the activities of these individuals that contributed to the dollar scarcity and the weakening of the Naira, adding that immediately it started investigating these directors a month ago, the CBN reeled out a new forex policy which sought to flood the market with excess dollar and strengthen the naira.

Some economic experts laugh at this claim, because an import dependent country with the price of its only export commodity (Crude oil), determined at the international oil market cannot hold an institution, let alone individuals responsible for the weakening of  its local currency.

But in a swift reaction, the Acting Director, Corporate Communications Department, CBN, Mr Isaac Okoroafor, said no director of the apex bank had been arrested by the EFCC.

“This is not true. No director of the bank (CBN) has been arrested by the EFCC. The current activities of the CBN in the forex market, is a result of months of study, monitoring and planning to tackle the activities of black marketers. “


Surplus Dollar Supply paradox

While some customers seeking to buy foreign exchange for Business Travel Allowance (BTA), Personal Travel Allowance (PTA), medical and school fees were being frustrated by some banks with claims that the CBN was not allocating enough foreign exchange to them for such purposes, the Central Bank of Nigeria ended the week with a fresh dollar intervention at the interbank market. It supplied dollars’ worth $100 million, while banks were unable to pick them all.

Specifically, while the banks had earlier made bids worth $91 million, CBN on its part offered $100 million and the lenders ended up picking $81.35 million, leaving about $18 million for the apex bank.

The Acting Director of Corporate Communications, CBN, Isaac Okorafor, attributed the inability of authorised dealers to pick up the entire offer of the CBN to increasing dollar supply and sense of apprehension among dealers who anticipate a further crash in the rate of the dollar.

Okoroafor’s position was further confirmed by Keystone Bank. The bank in a message to its customers on Friday stated: “In line with the revised policy of the CBN on foreign exchange, we are pleased to inform you that you can purchase forex for school fees subject to the following guidelines: Be recognised/guardian paying for school fees; Provide Bank Verification Number (BVN), admission letter, invoice from the school and duly completed form to their bankers; Provide the school’s bank details for direct payment to the school’s account. Kindly note that school fees payment is subject to maximum of US$15,000 per term or semester.”

The spread between exchange rates at the official and parallel markets has been gradually declining since the tail end of February 2017 with a possible convergence of rates in sight. This has largely been as a result of improved current account balance and external reserves which enabled the Apex Bank to resume forex sales through the deposit money banks.

Okorafor reiterated the determination of the bank to sustain its current interventions in the market, adding that “those who doubt the capacity of the CBN to sustain the intervention in the foreign exchange market are beginning to have a change of mind”.

Mr Ayo Teriba, Chief Executive Officer, Economic Associates, is optimistic that the CBN would be able to sustain its intervention on the forex market. Teriba said that increase in oil production and high oil prices had increased the foreign reserve base of the country. “We are back to a situation where the forex at the disposal of the CBN is likely to go up. Today, oil price is up, reserves have also gone up, the outlook of the oil prices is stable and production in Nigeria is going back to capacity; so it has the capacity to intervene. In a couple of months, the apex bank should be able to meet all of the demands and all the multiple exchange rates will converge.”


Developed and undeveloped forex market

The questions most economic experts are therefore asking are: Is it possible for a central bank to hide   information from the public on why supply of forex has helped its local currency to appreciate?  Could the managed-float forex system adopted by the apex bank be a way of manipulating the forex market? Is CBN creating a bubble like that of the stock market of 2008/2009, at the forex market, such that a dollar could be seen as having appreciated to N360/$, only to crash again within a short time to as low as N1000/$? How does an accurately developed forex market work?

First, it should be noted that aside from providing a floor for the buying, selling, exchanging and speculation of currencies, the forex market also enables currency conversion for international trade and investments.

In an article titled “Efficiency of Foreign Exchange Markets: The Case of Nigeria,” published in the Journal of Global Economics, a University don, Akbar MI of the Department of Economics North South University Bangladesh wrote that the notion of foreign exchange markets being inefficient cannot be attributed to the mechanisms of the market alone but dependence on other sectors of the economy.

By this submission, though a major determining institution, the  CBN cannot be held responsible for what is happening to the Naira because there are other sectors of the economy that influence the exchange rate of the Naira.

On the other hand, just as Investopedia explained,  it is interesting to note that “Central banks use their massive buying and selling capabilities to alter exchange rates through their open market activities and in many cases will do so not with profit in mind, but rather for any number of policy reasons. Forex brokers act as market makers as well, and may post bid and ask prices for a currency pair that differs from the most competitive bid in the market.”

In above instance, since central banks in many cases use their “massive buying and selling capabilities to alter exchange rates not with profit in mind,” most analysts would ask, in whose interest were the alleged manipulators of forex from CBN working for. The answer to this question may put to rest the issue of why EFCC is after CBN officials. And now that it is no longer news that the directors were invited by EFCC, can the Acting director come out with a proper defense? Another question is this, Is Nigeria’s operating efficient or inefficient foreign exchange market?

According to Akbar MI, accurately developed models can predict the exchange rate movements with precision if a foreign exchange market is inefficient. Thus, “inefficient foreign exchange markets provide the opportunity for speculators, investors and financial analysts with profitable foreign exchange transactions.

“Conversely, an efficient foreign exchange market system will adjust itself without government intervention. Additionally, market participants will not be able to put together abnormal profits from foreign exchange transactions and such markets have policy implications of enormous importance,”


ABCON proffers solution

In continuation of its determination to sustain liquidity in the foreign exchange market, the CBN informed market   participants   and   the general public that it will commence twice weekly forex sales to Bureaux de Change from today Monday, April 3, 2017.

While the sale amount to BDCs has been increased to $10,000, it said and a new rate will be announced today.

Alhaji Aminu Gwadabe, Acting President of the Association of Bureau De Change Operators of Nigeria (ABCON) told Nigerian Tribune that the Naira started trading with a promising outlook for sustained strength against other currencies but begin to summersault in the middle of the week and ended deeper northward on Friday to close N394/$.

He said this new onslaught on the naira by speculators and resistance of the banking industry to abide by forex rules is accounting for the naira misfortune on the market.

Referring to CBN statistics, he said that about 20 banks received $80 million weekly for invisible transactions as against the $20 million weekly for the over 3,000 CBN licensed BDCs nationwide.

He further recommended that public awareness to guide end users on availability and applicable exchange rates should be enhanced. Others are: supervision and penalty for infraction on operators; diversifying the buffers from oil proceeds to foreign investors inflows and diaspora remittances; sponsoring a bill for an Act of the national assembly for Naira convertibility in west Africa as Naira is currently a means of exchange in about 15 countries in Africa; increased security surveillance to checkmate illegal foreign cash evacuation at Nigeria’s airports/boarders.