AN economic and investment research expert, Tajudeen Ibrahim, has said stabilisation of the naira calls for substantially high interest rates that will attract foreign investors to bring in new money into the Nigerian economy.
According to him, though there are foreign investors in the Nigerian market, the US dollars owned by them are old monies which owners have not even been able to repatriate completely due to illiquidity.
Ibrahim, who is the Director, Research and Strategy, Chapel Hill Denham, in an interview on Channels Television, said in terms of investment, external new money will not flow in until there are substantially higher interest rates on fixed income instruments and money market instruments.
He said, “What the government and the Central Bank should be doing is to allow for elevated interest rates on naira denominated assets, such as the Nigerian local bonds and the Nigerian treasury bills.”
Such high interest rates, according to him, were reflected in the last auction on the bond market where the 10-year bond printed at 19 percent yield and at the treasury bills auction, the one year bill printed at 19 percent discount rates.
He said those levels of high interest rates over time can attract foreign investors to bring in US dollars, which will help the country to stabilise the local currency.
Ibrahim added that what is happening in the naira market is reflective of what is happening in the foreign currency markets.
The recently released data on capital importation into Nigeria by the National Bureau of Statistics (NBS) shows that Foreign Portfolio Investment (FPI) fell 52.8 percent year-on-year (y/y) to its lowest record of $1.2 billion due to aversion to the money market instruments (-69.5 percent) and bonds (-51.6 percent) although investment in equities grew 342.0 percent.
Consequently, the share of FPI in total capital inflows dipped to 29.5 percent as against 45.8 percent in 2022.
Similarly, Foreign Direct Investment (FDI), which accounted for 9.7 percent of total capital (previously 8.8 percent), fell 19.4 percent y/y to $377.4 million in 2023.
On why the weaker dollar does not have an immediate impact on the naira, Ibrahim explained that weaker dollar should be positive for the naira only in an environment or in a market where there is transparency, required level of discipline, required level of liquidity in terms of supply and in a market where there is no speculation on the currency.
He said, “That is when you will see stability or appreciation of your currency when the US dollar weakens.
“In Nigeria, we have a high level of speculation in the currency market. So even if the US dollar weakens, it is not going to reflect on our Nigerian naira and we need to restore confidence back into the markets before we can see such positive development where a weakened US dollar will immediately translates to a strengthened naira. Otherwise, instead of strengthening, the naira was even becoming weaker.
“What is very important going forward is for us to see an increase in supply. Yesterday the CBN was in the market to sell about $85 million to the participating banks at the official market. That kind of development is encouraging, but it is not enough to stabilise the currency.
“When we start talking about $500 million or $300 million intervention in a day, then that will bring about recovery of the currency.
“Yes, CBN does not print US dollars, but there are sources that the CBN and indeed the fiscal authority needs to monitor to ensure that those channels continue to supply US dollars for Nigeria.”
According to Ibrahim, one of such channels is the crude oil sales where the NNPCL needs to be a lot more transparent.
“They need to really work together with the CBN to ensure that there is high level of transparency and also ensure that there is inflow of US dollars into the CBN and support the ability of the CBN to supply US dollars to the foreign currency market.
“There is no other way other than to receive US dollars via exports. If we leave exports, the other channel to get US dollar inflow to the economy is the portfolio channel that will require elevated interest rates, because it is important that foreign investors will see what we call carry trade,” he stated.
He described carry trade in the market as a situation where you have low interest rates in advanced economies and those low interest rates will encourage foreign investors to look for frontier markets, such as Nigeria, to bring that foreign currency to buy and earn high interest rate.
“At that point, there will be a need for the depreciation of the currency to be minimised. Maybe five to 10 percent and then whatever increase they can enjoy above it “is what we call carry trade.”
He further said there is need for stability for foreign investors to be encouraged to want to tap into the opportunity in Nigeria and the starting point is elevated interest as a second channel.
The third channel, according to Ibrahim, is where the CBN and the fiscal authority can consider raising debt.
“The Euro bond market is not where we can possibly go in the immediate term, but in the second half of the year, chances are that there will be an accommodative monetary policy stance in the US. Interest rates in that environment will be much lower. That will give us the room to begin to think floating Euro bonds in the second half. That is the next channel I am looking at.”
Another channel he said is domiciliary accounts where owners can be encouraged to invest their dollars in dollar-denominated instruments.
The investment analyst said there is a need for the sensitisation of the public because “whatever the government does, whatever the central bank does, if Nigerians continue to speculate on naira, it is unlikely that there will be stability. Citizens should stop speculating on their national currency because of the negative impact it will have. It will not be the impact on the speculator alone, but it is a big impact on almost all the citizens of that country,” he stated.
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