N a i r a: Travails of a troubled currency

The sliding value of Naira in the money market in relation to Dollar, Euro and Pound Sterling has become an issue in the country. Prices of goods and services have soared so much that even pepper sellers now attribute the high cost of their products to Naira’s poor exchanged influence. CHIMA NWOKOJI in this report sought experts’ opinions on how the Naira can be saved.

The Central Bank of Nigeria is hoping that the Naira will eventually settle at N250 from its recent average weekly levels of N310 to a United States dollar at the parallel market. Foreign investors and offshore financial analysts, however, are saying that the Naira is yet to find its true value and needs to be devalued below N400/$, whereas Nigerians are groaning that cost of food items has risen beyond manageable levels.

All these expectations point to a currency under serious pressure. In fact, when the Nigerian Naira took a dive on Thursday July 14, 2016 at both parallel and official markets, Bloomberg in the data it released indicated that Naira was showed as the worst performing local currency in Africa in 2016.

Naira at the interbank market began trading that day at around N283 to the dollar. It depreciated to 284/$1 to become the third worst performing currency in the world for 2016.

According to Bloomberg data, the Nigerian Naira came ahead of only two currencies in the world – Venezuelan Bolivar and Suriname Dollar.

What then went wrong with Naira, a currency that was stronger than the dollar in the early 80s? As of today which position does it occupy among global currencies?

To answer the question, Sunday Tribune sought the views of economists and financial experts who offered constructive insight to the plight of the Naira. However, it is pertinent to recall that the parallel market rate on that day fell to its lowest level since the start of the new foreign exchange regime, trading at 363/$1 and N485 to the pound in Abuja and Port Harcourt. The Euro traded above N390 in Lagos and under N380 in the nation’s capital, Abuja.

But as of Thursday August 25, the story had become even worse. The Naira took its deepest daily interbank dip as fewer banks were allowed to trade on the official and non-official side of the foreign exchange market. It fell by about nine per cent in less than 24 hours to initial trade at N342 to the dollar, but closed the day at N 316.84 after interventions by the CBN. This was 0.29 per cent better than N318.25 to a single dollar which it traded for on Wednesday.

The local currency remained relatively stable at the parallel market, where it traded between N402 to N405 to the greenback – near its closing price on Wednesday. This performance was apparently worse than the July 14 levels that earned it the third worst performer in the world.

The Naira even exchanged for N409 to the dollar at the parallel market on Wednesday August 24, 2016 while it also traded at N505 and N440 against the Pound Sterling and the Euro, respectively same day.

On the flip side, Bloomberg data showed that the best performing currencies in Africa are South African Rand, Zambian Kwacha, Somali Shilling and Botswana Pula, which have gained 8.88 percent, 8.69 percent, 5.54 percent and 4.95 percent respectively. At the base of the African currencies are the Naira, Mozambique New Metical, Sierra Leone Leone, and the Angolan Kwanza.

Incidentally, the story of the Naira’s performance can better be told and understood through the experience of the Ohuakanwas. Narrating his ordeal to Sunday Tribune, Mr. Damian Ohuakanwa, an economist and former banker, who applied for admission in a Canadian University in 2014, said his brother promised to give him $10,000 if he was granted visa. This amount when converted to naira at N160 official exchange rate then amounted to N1.6million.

Unfortunately, Damian said he was not granted visa. “Just last week, I reminded my brother about his promise, as I prepare for another interview with the United States embassy, he told me that I would have to take the dollar equivalent of N1.6 million which was the value of dollar to Naira at the time he made the promise, stressing that even if he were to get a dollar at spot rate of N300, he did not have N3 million ($10,000) to give me today; an additional N1.5million. This means that the exchange rate is also forcing people to renege on promises,” Ohuakanwa stated.

How did Naira fall to N400/$?

The fall of the naira is an opportunity to learn something new and move forward. First of all, how did Nigeria get into this mess? How can we get out of it? The attempt to answer these questions is the learning curve that will take Nigeria to a greater height.

The Director, Monetary Policy Department, Central Bank of Nigeria (CBN), Moses Tule, tried to answer the questions during the last CBN seminar for Finance correspondents and Business editors in Ibadan.

For him, every Nigerian has a case to answer. He was of the opinion that everybody should examine himself as truthfully as possible. He observed that over 80 per cent of what most people who attended the programme wore were imported, leaving local content at less than 20 per cent. Clearly, under that scenario, he had queried why would the naira not be under pressure? How about the recruitment attitude of Nigerian companies to prefer a foreign degree to a Nigerian degree? This situation has led an average Nigerian to send his children and ward overseas for education. The issue of affluent people and even government officials going abroad to treat even headache and fever has dominated public discourse for a long time and often cited as one of the reasons the demand for dollar is high.

Minister of Agriculture, Chief Audu Ogbeh was recently quoted to have revealed that demand for dollars from Nigerians is $2.5billion a week.

“I was reliably told, but we don’t have it, we don’t print dollars and people are angry we don’t make it available,” he said.

Available records show that foreign exchange utilisation amounted to $921,352,549. The amount was the total allocation for March to 17 commercial banks in the country, by the central bank for March. Analysis show that Forex allocations in the month of March ranged from fuel, machinery and pharmaceuticals imports, all the way down to school fees and personal travelling allowances. Allocations for the payment of tuition fees overseas were the most numerous items. Also, other invisibles such as business and personal travel allowances, repatriation of capital, and divestments by foreign portfolio investors from the equities and bond markets accounted for a large chunk of forex purchases, in terms of volume. Based Sunday Tribune computation, Zenith Bank Plc got a total of $102,279,505 from the central bank, Guaranty Trust Bank Plc (GTBank) was allocated $102,565,144, Stanbic IBTC got $100,590,015, while Standard Chartered Bank of Nigeria got $69,088,105 to meet their various customers’ demands.

Economists are emphatic that foreign exchange rate, like every other good or service is driven by the law of demand and supply. Demand for dollar in Nigeria is higher than supply especially now that the country earns less foreign exchange from oil exports. Currency and business analysts have equally given reasons why the Naira is continually under pressure.

Bismarck Rewane, Finance analyst and Managing Director, Financial Derivatives Company (FDC), Limited, said: “As oil prices dipped, the Central Bank of Nigeria (CBN) has prioritised stability of exchange rate in the official market. It has drawn an exclusion list of avoidable imports from being funded in the official market. With the foreign exchange demand for the items transferred to the parallel market, rates in that market have soared.”

Besides, other factors like terms of trade, inflation differential, public debt, current-account deficits, interest rates, political stability and the overall economic health determine the exchange rate of a currency.

The fall in crude oil prices has reduced Nigeria’s dollar earnings, making it difficult for the apex bank to fund imports. Record oil prices had helped Nigeria to build the largest currency reserves in sub-Saharan Africa. The price peaked at $63 billion in September 2008. But, after attaining a record-high of $147 in July of that year, Nigeria’s crude oil prices – bonny light, have plummeted.

On February 20, 2014 Renaissance Capital (RenCap), an international investment Bank predicted that  the new CBN governor, expected to take over on permanent basis from Lamido Sanusi, may devalue the Naira. RenCap said this before Mr. Sanusi’s suspension. In its risk case scenario, the firm said “Although our base case is for no devaluation in 2014, there is a risk that the new Central Bank governor may devalue the naira, as Kazakhstan’s new central bank governor did in February 2009.”

Nigeria draws mainly from the forex reserves to help the Naira from falling helplessly.  But data from the CBN showed that as of August 16, 2016, the forex reserves have fallen to $25.78billion. This means that from $49 billion before the global crisis, the nation’s reserves have fallen by $23.22 billion.

“We believe they will likely fall further in 2014 on the back of subpar oil production and higher imports due to election-related spending. We think the cumulative deterioration in Nigeria’s external position in 2013 and 2014 implies devaluation in 2015, after the elections; a devaluation before the elections would be unpopular for an import-dependent nation. We think a N160-170/$1 target range is likely. One upside for the government from a weaker naira would be more naira from dollar oil tax revenue” Renaissance Capital said in its outlook on the nation’s foreign exchange.

President of Dangote Group, Alhaji Aliko Dangote, spoke on yet another area that he believes contributed to the pressure on the local currency. He was quoted as saying: “The issue with subsidy is that government needs to block all loopholes. If there’s no subsidy, it will affect our foreign exchange; we’ll end up buying a dollar at N500, because there’s no Value Added Tax (VAT) on petroleum products. That’s why the import of petroleum products is taking about 30 per cent of our foreign reserve. We just need to make sure that there’s no siphoning of money.” Today, the Buhari government is being vilified and praised for virtually removing subsidies.

Also, acting president of the Association of Bureau De Change Operators of Nigeria (ABCON), Alhaji Aminu Gwadabe, once confirmed that a majority of the buyers of foreign exchange  were from neighbouring countries of “Ghana, Chad and Benin Republic who wanted to take advantage of the low dollar rate.”

Jurgen Hecker, Paris, France-based financial expert believes that the problem is that Nigeria imports almost everything. He added that the floating exchange rate regime is an official devaluation, which means that importers will need to pay many more Naira for the dollars that they need.

“And this will feed back into prices that Nigerian consumers have to pay for everything that is imported which, as we know, is almost everything. And that is what I mean that Nigeria has become poorer,” the financial expert said in an e-mailed message.

Andra Omogbolahan, a financial analyst explains that the exchange rate of dollar at the parallel market is purely not in the interest of people with love for ostentatious lifestyles and that Naira depreciation in the black market doesn’t have any effect on common masses. To him, apart from the certain directives of the CBN which has evidently affected the services of BDCs, anybody who likes to go abroad for holiday, buying fairly used cars or sending their children to school abroad are always in desperate need for dollars in exchange for such luxury, hence high in dollar demand against supply.

Position of foreign investors

The Paris, France-based financial expert, Jurgen Hecker, bringing the perspective of foreign investors believes that what is happening to Nigeria also happened in Europe, too. For example, he recalls when France in the 1980s tried to avoid devaluing the Franc against the German Mark because of national prestige. This he describes as ‘economic nonsense.’

“The longer you maintain such a fiction, the higher the price. You can compare this kind of situation to a man who has lost his job and now has to work in another job for much less money. But he is afraid to tell his family that they can no longer afford a holiday, or a car or their house. So he pretends that he still has the old job and borrows money from the bank to keep up the old lifestyle. Until one day he can’t pay off the loans and bank wants all the money back at once and the truth comes out and now he and his family are poor.

“For the ‘job’ you can substitute ‘oil revenue’ and for the ‘family’, the Nigerian people, and for the ‘borrowing’, the naira peg, and for the ‘bank’ foreign investors, and you get an idea of what has been going on.”

Hecker explains that the man (Nigeria in this case) has accepted to tone down his lifestyle but he has to convince the bank (foreign investors) that he means it, he has to build trust. Maybe then the bank will start giving him credit again so he can feed his family.

This analogy, he said, also applies to Nigeria. “Does President Buhari really mean it? Is the Naira really where it should be or are there still hidden controls; is there still some pretending going on?

“Investors suspect that there is and maybe the currency has not hit rock bottom. But until it does, there will not be any significant investment going into Naira assets, because who wants to invest in a currency that may have to fall further? So this creates uncertainty and this is probably unavoidable, until trust can be built. The pain was quick, the recovery will be slow.

“It will take time to build export industries that can profit from selling cheaply abroad because of the weak currency.

“It will take time to deal with the inevitable surge in inflation that follows such devaluation. And it will take time for investors to want to return. Think of it as the crossing of a desert. But the thing is, there was no alternative to this. If there had been, President Buhari would have chosen it, he had run out of choices,” the analyst stated.

How Naira can be saved

Robert Omotunde, Head of Investment Research at Afrinvest West Africa Limited in a telephone conversation with Sunday Tribune said the question of how to save the Naira is a one million dollar question. By this, he suggests that a lot of issues are involved. To save the Naira invariably means to save the economy because it is only a strong productive economy that is less dependent on import, with deep reliance on diversified and non-oil sector that will have a strong currency.

According to Omotunde, to have upward appreciation of the Naira, there should be foreign exchange inflow. But having adopted the floating exchange regime, and given the level Naira exchanges at the moment, such inflow ought to have been coming in “but the investors are still afraid. They are not confident over the stability of government’s policies,” he added.

The finance and economic analyst further said that the federal government and indeed the central bank are going about the issue of non-oil sector development the wrong way. To him, one would have expected that after adopting the floating exchange rate regime, the ban on 41 items not eligible for foreign exchange transactions would be lifted. However, he noted that it is still a concern that some of those items are still banned.

According to him, ban can only continue to induce pressure on the local unit at the parallel market and may not encourage local manufacturers, some of whom needed most of the items as raw materials, Omotunde explained.

“In our view, that may still create some form of market distortion but in any case what they have done now is just to bring in some respite into the market and we would expect that this new market which the CBN has guided will help address most of the concerns around the imbalance.

Speaking on how Naira can be saved, Hecker said hope is not lost. To him, there may be a few bright spots. “One of them is that the oil price has recovered and prospects for oil are better than at any time in the past two years. The International Energy Agency predicts that demand will match supply worldwide before the end of this year. This may not lead to a huge rise in the oil price because there are still big inventories to be wound down. But it’s a start. This is like a man getting a better job with better income in the middle of a crisis. It’s a great help.

“And hopefully for Nigeria the government will have better successes against rebel attacks on oil installations, which are the equivalent of a man not being able to get to his job every day because his car keeps getting vandalized. It’s got to stop.

“There is also a chance that foreign governments and institutions like the IMF will help if they see real change. Nobody wants to see Nigerians suffer if it can be helped.

“Nigeria today is like a man saddled with debt trying to make a fresh, honest start. It’s not going to be easy, but in the end it will pay off. Or so we hope,” he submitted.

Renowned economist, Dr Ayo Teriba, said the fall in value of the naira is attributable to the inability of the country to attract Foreign Direct Investment (FDI) in critical infrastructural sectors. Much as he agreed the fall in oil prices contributed to the slide, he said Nigeria should have cushioned the effects by offering some of its shares in the wholly-owned parastatals to foreign investors.

According to him, “If you look at the oil and gas sector, you find that the government is still in charge of many sub-sectors 100 per cent. Our refineries are still owned by government 100 per cent. If we sell off a part of our owning, we will attract dollars to the economy because it is a dollarized sector. We own pipelines 100 per cent too. We have to consider shedding some of those shares to earn foreign exchange.

“Look at the power sector too. The government is wholly in charge of generation and transmission. Many foreign countries want to get involved but we are shutting them off. If we allow them in these areas, they will bring dollars and also develop infrastructure for those areas.”

Teriba also said the rail sector offers veritable opportunities for the country to attract FDI and earn dollars. “Rail is particularly an interesting area we should consider. If we bring in foreign sectors, we can get dollars in circulation in return and they will build infrastructure. The era of keeping everything to oneself is over. Government has to start allowing FDI to boost and galvanize the economy,” he explained.

Teriba also said that for example, Saudi Arabia offered 10 per cent of its national oil group, Saudi Aramco, through Initial Public Offer (IPO) that fetched over $1billion to the oil rich nation just recently.