Now that naira is on the rise again…

MUCH to the relief of many Nigerians who had almost given up hope on the Naira regaining its strength in the immediate future, the Central Bank of Nigeria (CBN) last Monday announced a set of guidelines meant to revive the national currency that had been gasping for breath with the effect that the naira has within the last one week experienced 13 per cent improvement of its value.

The naira had steadily weakened against the dollar and other major currencies over the last one year due principally to shortage in the supply of the greenback. Nigeria relies on sale of crude oil for its export earnings but between mid-2014 and mid-2016, crude oil price slumped. The government’s attempt to protect the Naira with the nation’s foreign reserves worked for a while but the strategy had to be abandoned when the reserves were depleted. The effect of the abandonment was foreign exchange scarcity in the country. Being an import-dependent nation, the high demand for dollar when supply was low pushed up the value of the greenback and increased its exchange rate to the naira. The CBN came up with many policies to salvage the national currency but nothing seemed to work.

However, the price of crude oil has been going north since mid-2016. This coupled with the stemming of attacks against crude oil pipelines in the Niger Delta region, which precipitated an increase in Nigeria’s daily production from about one million barrels of crude oil in 2015 to almost two million currently, led to a rise in the nation’s foreign reserves, thus equipping the apex bank with dollars to once again defend the national currency.

In a statement signed by Isaac Okorafor, CBN’s Acting Director of Corporate Affairs, to announce the new policy, the apex bank had said it would provide direct additional funding to banks to meet the needs of Nigerians for personal and business travel, medical needs and school fees. The statement added that all banks would receive amounts commensurate with their demand per week, which would be sold to customers able to meet usual basic documentary requirements.

While assuring parents who need to pay their wards’ school fees abroad as well as patients who need to pay medical fees in foreign countries of its readiness to make forex readily available to them, the CBN noted that “such  payments must  be  made  by  commercial  banks directly  to the  institution specified by  the  customer.  The CBN would ensure that this process is as smooth as possible and that as many customers as possible get the foreign exchange they genuinely demand. This would also  apply  to  customers  seeking  to  make  payments,  or purchase  foreign  exchange for  medical  bills  and  paid  directly  to hospitals.”

Since the policy came on stream, the CBN has been pumping dollars into the market. On Tuesday, a day after the announcement, the apex bank auctioned $370 million to 23 banks. It also auctioned another $230 million through forward contracts on the interbank FX market on Thursday. It is also expected to commence today the weekly sale of $1million to each of the 21 commercial banks at N375/dollar. This is to facilitate the clearing of backlog of demand for retail users.

In response to these measures by the CBN, the naira has been on the upswing. From N520/$ on Monday, it went to N512/$ on Tuesday, N505/$ on Wednesday, N495/$ on Thursday and has been hovering around N480/dollar since Friday.

Commenting on this development, a Kaduna-based economist, Joseph Kadeer, linked the resurgence of the naira to the removal of hassles related with accessing foreign exchange.

His words, “The lure for patronizing black market operators is the ease with which one could get the dollars. Until the new policy, buying dollars from the banks was hellish. You had to wait for months to get dollars to buy. For those who had emergency issues; paying school fees or settling medical bills, waiting for that long was out of the issue. So, they had to resort to the black market where you could just walk in and within a few minutes get the dollars you want. This is what caused the weakening of the naira. Let’s ask ourselves, who in his right senses would opt for the black market if he could get the dollar with ease in a bank? It was scarcity that forced many people to patronize black market operators. By making dollars readily available in banks, the CBN has solved that problem.”

But there have been concerns about the sustainability of the current strategy adopted by the CBN to save the naira. Dr. Austin Nweze of the Lagos Business School says while the new effort by the apex bank is welcomed, its sustainability is doubtful.

According to him, “It is good to see the naira gain against the dollar on a consistent basis for one week. That has not happened in a long while. This happened because the CBN pushed out dollars into the market. The CBN could do that because it has dollars. The CBN has dollars because of the rise in the price of crude oil in the world market. So, we have to hope that the price of crude oil will be on the rise on a continuous basis for the naira to remain strong. What I am saying in essence is that we are putting the fate of our currency on factors that are not within our control. That is not quite healthy. What happens if the price of crude crashes again? That means the naira will also crash.

“What I think the government should do is to come up with robust fiscal policies that will promote import substitution and encourage local production that will reduce demand for dollars. We are import-dependent; that means we will always need dollars. So, if there is a reduction in supply, there will be a crisis.  A way out of this is to encourage local production of many of the things we need in the country.”

Nweze lauded the CBN’s effort to promote local production of rice, adding that this would help the naira as well as the economy.

“We eat rice a lot as a people but we produce so little of it. The CBN’s intervention will lead to an increase in local production of rice. It will also result in a reduction of importation of rice which means we will be able to conserve foreign exchange in that respect. This is quite good but it is like an oasis in the desert. We need to do this across so many sectors. We need to increase the local production of tomato, we need to increase local production of many items. It has to be a coordinated exercise for it to make the required impact on the economy,” Nweze said.

But to Jide Adebiyi, a financial analyst, the CBN’s pumping of dollars into the market is an interference which would distort the reality of the market, not an intervention.

He explained, “In June last year, the CBN announced that it was floating the naira. This means that its value would be market-determined. How do you reconcile what happened on February 20 with that policy? The CBN is consistently inconsistent. The CBN should make up its mind on the kind of currency it wants because these inconsistencies send wrong signals to investors. An investor wants to be sure of what to expect in an environment, if he is not sure he stays away. We need policy consistency to build investors’ confidence. If we continue with this, it will be difficult for us to gain investors’ confidence and that will stall development.”

While acknowledging that the latest effort by the CBN had resulted in the resurgence of the naira, he said that was coming at a huge cost.

He said, “What the CBN is doing is using the foreign reserves to protect the naira. We may have a seemingly strong naira if it is sustained but we shall pay dearly for it. The foreign reserves should be used to develop infrastructure, not to defend the naira, it should be used for capital projects, not to defend the naira. Using the foreign reserves to defend the naira is a quick fix that will not benefit the nation on the long run. We need to encourage local production rather than using our reserves to protect the naira.”

Speaking on when the improvement in the naira/dollar exchange rate will reflect in the prices of commodities, Nweze said that cannot be immediate.

He said, “It will take a while. We are not likely to see the impact on prices of commodity in the next one month because the commodities available in the country now are those brought in with high-priced dollars. These ones have to be sold and new ones brought in before we can begin to notice a difference in prices of commodities. Then the improvement of naira has to be sustained. This is what will encourage many importers to bring in the commodities and that will naturally force down prices.”