Stakeholders doubt sustainability of Naira’s 13% recovery against dollar

THOUGH the new foreign exchange policy action of the Central Bank of Nigeria (CBN) is yielding immediate success, stakeholders in the financial system are doubtful whether this will be sustainable.

The CBN’s aggressive intervention and moderation in demand in the unofficial market led the Naira to post its biggest one-week rally of 13 per cent in more than 3 years at the parallel market.

The local currency according to dealers from an investment banking and securities company Afrinvest, appreciated from a low of N520.00/US$1.00 before announcement, to a three-month high of N460.00/US$1.00  after announcement as speculators with short Naira positions sold off.

The Naira rally in the parallel market in addition to increasing external reserves, stable crude oil prices and rebound in oil production to 2.2 million barrels per day (mb/d) (according to Finance Minister Kemi Adeosun) have prompted three questions from market participants.

The questions raised by the company are: “Is the Naira rally in the parallel market a dead cat bounce or a signal for sustainable fundamental change in sentiment? Does the Central Bank have enough Dollar liquidity to sustain pace of interventions for commercial transactions in the interbank and retail end users? Will the fundamental change in current account dynamics (a major determinant of long run exchange rate) encourage the CBN to relax its currency peg, a decision which could buoy capital account activities and autonomous supply of FX liquidity?”

In the vies of analysts from the investment banker,  whilst the implementation of the revised FX market guideline has been greeted with much optimism, “we do not believe this move can sustainably address the lingering FX liquidity challenges in the economy without relaxing FX rate peg and review of list of items ineligible for FX transactions in the parallel market.

“Personal and Business travel allowances, school fees and medical fees have been estimated to account for less than 20.0 per cent of total FX demand in the country; hence there is still a large volume of demand (particularly the 41 ineligible items) that could pressure rate at the parallel market.”

Specifically, the analysts stated in a note to investors that it is hard to make an exact call on direction of rate, but it is unlikely the parallel rate will breach the N500.0/US$1.00 mark again in the shorter term as a more dollar liquid CBN will not shy from further interventions.

“Yet, our medium term conviction remains that maintaining the interbank rate at current peg (without implementing deeper reforms required) will lead to deterioration in current account as more demand surfaces.

“Hence, there is still a need to address the FX liquidity challenge appropriately and we reaffirm our view that increased flexibility will be needed in order to  restore investor confidence and boost autonomous FX supply,” the analysts said.

In a “shock and awe” move, the CBN held two successive 60-Day FX forwards sales totaling US$600.0 million since the release of the circular last week Monday. This drove interbank lending rate above 200.0 per cent as Banks scrambled for Naira liquidity to position at the auctions.

Dealers say Deposit Money Banks (DMBs) have also started to call for bids from retail end-users in preparation for the first PTA/School Fees auction.

Instability has been a recurring theme in the Nigerian foreign exchange market, particularly at the parallel segment, since the oil market downturn which began in second half of 2014 and subsequent constraints from the capital account due to underwhelming policy responses.

The Naira consequently shed 46.5 per cent and 66.3 per cent in the interbank and parallel markets respectively between June 2014 and January 2017, while the spread between the two rates reached an all-time high of N215.00 week before last  as monetary authorities remain reluctant to implement “short term painful, yet necessary” reforms.