How Emefiele, his team ensured forex stability

ON February 16, 2017, a unit of United States dollar exchanged for N510 but on February 13, 2019 when presidential elections held, the exchange rate stood firmly at N305.8/$. In the intervening two years, a lot of water passed under the bridge for both the naira and Central Bank of Nigeria (CBN). It was the first time in Nigeria’s history that its currency experienced appreciation after it depreciated. Historically, naira moved from a commanding height of N75/$ in the early 1980s to its current level, never returning to previous levels despite periods of oil boom over the years.

According to the CBN, the continuous pressure on the foreign exchange market was also attributable to the rise in the internal demand for the dollar by 2015.

The CBN Governor, Godwin Emefiele, said that the country spent huge assets from the foreign reserves in ensuring that the official exchange rate was maintained at its previous value of N155 to a dollar.

In spite of the government’s efforts to shore up the Naira, the CBN devalued the Naira to N168 to a dollar in November, 2014.

Naira, just like currencies of other emerging and frontier markets have been under tremendous pressure from falling commodity prices, normalization of monetary policies by developed economies and most importantly, the insatiable appetite of Nigerians for foreign goods. More recently however, trade tension between United States and China, renewed tension between US and Iran and even between India and Pakistan have triggered over 20 percent depreciation of four emerging market currencies since the beginning of 2018.

However, a determination by Godwin Emefiele and his team at CBN ensured that once they were able to turn around the fortunes of the currency in May 2017, most of the backlash from global economic and political developments have not had negative impact on the naira as the currency remained stable.

It is the conviction of Emefiele that maintaining stable exchange rate to avoid depreciation of the naira is better than building foreign reserve buffers. He said that all frontiers and developing markets had suffered not just depreciation, but had also lost reserves. According to him, “we are very conscious of the need to build buffers; but unfortunately, I must say that we are in the period where it will be difficult to talk about building reserve buffers. We can only build reserve buffers if we want to hold on to the reserves and then allow the currency to go, and wherever it goes is something else. So, it is a choice we have to make and at this time, the choice for Nigeria is to maintain a stable exchange rate so that businesses can plan and we do not create problems in the banking system.” The Governor said like other emerging markets, Nigeria has also lost reserves but only marginally because it has managed to sustain stability in its foreign exchange market.

Some of the initiatives embarked upon by CBN that ensured stability of the naira despite internal and external pressures include introduction of various foreign exchange windows, revminbi currency swap, Increased supply of forex to bureau de change (BDCs), over the counter sale of foreign exchange to genuine customers for invisibles, 42+ items, anchor borrower’s programme (ABP) and the produce, export, earn forex in addition to regular interventions at the interbank foreign market to maintain liquidity.

Forex initiatives

The I&E window was established to deepen the foreign exchange (FX) market and accommodate all FX obligations by boosting liquidity in the FX market and ensuring timely execution and settlement for eligible transactions. The economy has seen major inflow of forex in recent months with over $51 billion recorded in the I&E FX Window. This willing-buyer willing-seller window, allows foreign investors to find buyers for their dollars at a mutually-agreed price. The apex bank is responsible for 15 per cent of all the transactions carried out in the window.

Emefiele and his team also introduced the spot and forward market where forex is traded for immediate and future delivery. This window helped to alleviate a lot of pressure on the forex market as traders got the assurance that CBN is able to meet their foreign exchange needs at any point in time.

Regular intervention in the market helped a great deal in ensuring liquidity. Though these interventions, the bank spent $20.91 billion to defend the integrity of naira in the second and third quarter of 2018 at the various segments of the market. In the economic report for fourth 2018, CBN explained that it injected $30.74 billion into the forex market in 2018.

The bank injected $10.97 billion into the foreign exchange market in the first quarter of 2018. The figure dropped to $7.89 billion in the second quarter. In the third quarter interventions rose to $11.88 billion and $9.18 billion in the last quarter.

Average exchange rate of the naira vis-à-vis the United States dollar at the interbank segment depreciated by 0.2 per cent to N306.70/$, relative to the level at end-September 2018.

“Similarly, at the BDC segment, the average exchange rate, depreciated by 0.9 per cent and 0.01 per cent below the levels in the preceding quarter and the corresponding period of 2017 to N362.42/$. At the investors’ and exporters’ window segment, the average exchange rate stood at N364.27/$, representing 0.5 per cent and one per cent depreciation relative to the levels in the preceding quarter and the corresponding period of 2017, respectively.

“Consequently, the premium between the average interbank and BDC rates widened by 0.8 percentage points in the review quarter, from 18.2 percentage points at the end of the fourth quarter of 2018, but the spread between the average exchange rates at the investors’ and exporters’ window and the BDC segment narrowed further to 0.5 per cent from 0.9 per cent at the end of the preceding quarter.”

An analysis of the report showed that foreign exchange inflow into the economy increased by 2.8 per cent to $27.64 billion as of the end of December last year. The increase in foreign exchange inflow was as a result of the 12.3 per cent increase in inflow through the CBN. Oil sector receipts, which accounted for $3.02 billion, showed a decrease of 14.5 per cent below the level at the end of the preceding quarter.

Autonomous inflow of foreign exchange was put at $13.13 billion, which fell 6.1 per cent below the levels at the end of the preceding quarter.

The 42+1 items

In June 2015, CBN published a list of 41 items that were no longer eligible for importation through foreign exchange sourced from official sources. They include cement, margarine, meat and processed meat products, private airplanes/jets, roofing sheets, wooden doors, toothpicks, textiles, soap and cosmetics. In December 2018, it added fertilizer to the list. These are items that are either already being producing locally or which the bank felt should be produced locally in order to grow the economy. The aim is both to conserve forex and diversify the economy.

Late in 2018, Emefiele further hinted that items on the foreign exchange restriction list may soon be increased to 50 in order to boost local production and stimulate the export market. “To put it in proper perspective, by the time you dimension the size of the foreign exchange we use in importing petroleum products into the country, it is at least one third of the foreign exchange the CBN spends to import items into Nigeria today. By the time we add also the 42 items that we have, which certainly we are going to increase from 42 may be to 50 or more in due course because we are going to get more aggressive in ensuring that more and more food items that are being imported into this country are added into the FX restriction list.

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“I am saying that by the time we add the savings from the production and export of petroleum products; by the time we also add the foreign exchange that we spend on food items, close to 55 or 60 per cent of what the CBN or what the government spends in funding its foreign exchange operations will be saved in the country.”

Agriculture initiatives

The Anchor Borrowers’ Programme (ABP) which has turned out the star policy and achievement of the Federal government in the last four years together with other initiatives like the Commercial Agriculture Credit Scheme and other packages for Small and Medium Enterprises (SMEs), are have significantly boosted the economy and protected it from too much exposure to volatiles experienced by developing economies in recent years.

CBN has committed over N23 billion to the ABP in 14 participating states. In Kebbi where it was first launched, over 78,000 participating smallholder farmers now cultivate about 100,000 hectares of rice farms. With this Nigeria is already looking forward to becoming self-sufficient in rice production by the end of 2019 from a position just a few years ago where it imported nearly all of the 6.1 million tonnes which it consumes annually.

The apex bank has expressed its commitment to doing more with other identified crops such as rice, maize, cotton, sorghum, cassava, cocoa, dairy, tomatoes, and groundnut.

Stakeholders comment

Coalition of Civil Society Group (COCSG) while appraising these initiatives commended Emefiele on his adoption of some revolutionary policies that helped to stabilise the economy and sustain the value of naira in the last two years. President and Secretary of the group, Etuk Bassey Williams and Abubakar Ibrahim in a statement said the continued churning out of initiatives by the apex bank no doubt produced the desired results.

The coalition also noted the efforts of the CBN governor to boost the availability of forex to end users through the banks’ retail outlets as well as the reduction of the tenor of its forward sales from the hitherto maximum cycle of 180 days to not more than 60 days from the date of transaction.

“Measures aimed at strengthening the value of the Naira against the US dollar in the overall interest of the economy and Nigerians as a whole under Emefiele’s leadership has been remarkable as since February 2018, the pumping of money into the forex market has significantly strengthened the naira against the dollars to close at N380/$1 at the parallel market. Also, asid e direct sales to BDCs, fuel importers, airlines, manufacturers, agriculture sub-sectors have continued to benefit through the retail-Special Secondary Market Intervention Sales, SMIS, at a marginal rate of N310/$, has continued to help stabilise our economy and boost the nation’s GDP.”

Similarly, Head, Department of Finance, Nasarawa State University, Professor Uche Uwaleke, called on the apex bank to explore innovative ways to support domestic industries beyond the use of forex policies.  “There is no doubt that the CBN’s forex policies have helped the growth of local industries in Nigeria.  Notable among these is the restriction of access to official forex placed on 41 imported items. This measure was not only in support of the Federal Government’s import substitution strategy, but it was also a demand- management strategy, which helped to conserve scarce forex, especially during the period of oil price slump. Today, thanks to that restrictive measure, a number of products, which were hitherto not produced here such as toothpicks, are now being manufactured locally. The introduction of the investors’ and exporters’ window, on the back of crude oil price, recovery, has equally helped to stabilise the exchange rate, facilitating raw materials imports for local firms. That said, the CBN should continue to explore innovative ways to support domestic industries beyond the use of forex policies.”