Naira at crossroads as illegal forex deals persist

The naira is facing one of its darkest days in its over five decades’ history, hitting a new low of N500/$ at the parallel market. The depreciation of the local currency at both official and parallel markets paints a gloomy picture of an uncertain future that needs drastic action to fix. The Central Bank of Nigeria (CBN) has instituted policies to reduce currency pressure fueled by forex speculators and other illegal dealers. COLLINS NWEZE writes that winning the naira and exchange rate stability war would require more than policy implementations to include sanctions against confirmed cases of abuse

Mohammed Abudulkadir, a currency speculator, was preparing for the Suri prayer when he got a WhatsApp message that made him richer. His business partner, Abubakar Idris, had on November 27, informed him that the naira was exchanging for N496 against the dollar in the parallel market.

Abudulkadir hurriedly said his prayer, moved to the vault where he kept $100,000 to confirm it was intact. He then called five of his most trusted aides and gave them $20,000 each to exchange to naira. “I made N117 extra on every dollar sold because I bought at N379/$,” he disclosed.

The transactions concluded within three hours because of the number of manufacturers, importers and other end-users of foreign exchange (forex) waiting to buy the greenback, fetched him N11.7 million profit.

Abudulkadir is one of the thousands of currency speculators capitalising on the heightened forex supply shortage, demand pressure and rationing by the Central Bank of Nigeria (CBN) to create fear, panic and volatility in the market.

These speculators have also made it difficult for the local currency rates to converge as they kept manipulating the parallel market exchange rates against official rates.

The naira has been exchanging at N379 to a dollar in the official market, but in the parallel market where a large part of the demand are settled, the local currency is facing the highest level of volatility in its over 50 years’ history where it has met series of devaluations and adjustments based on market realities.

It was not only devalued by 45 per cent in the last 16 years but in 2001 alone, its value was slashed 27 per cent. If one thinks that the 2001 debacle was worrisome, the naira has exceeded that loss, as it has depreciated by nearly 30 per cent this year alone.

The local currency first hit double digits in 1991, moving from N9.9 to N17.2/$ the following year. That constituted a significant 73.7 per cent change. Thereafter, a continuous slide ensued, attaining triple digits in 2000.

Although it was considerably stable between 2000 and 2003 (below N120/$), the recent adverse global capital flows especially to developing economies and drop in oil prices, among other factors, have culminated in the current low of N500/$ at the parallel market.

An economist, Bismark Rewane, explains why the naira is on the downside. “As oil prices dipped, the 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,” he said.

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.

Hence, 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 reserves 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.

As at yesterday, crude oil was trading at $46.39 per barrel and the foreign reserves level has declined to $35.6 billion.

A large chunk of the reserves went to defending the naira through weekly dollar interventions, raw materials imports for manufacturers, weekly dollar sales of $10,000 for each of the 4,500 CBN-registered Bureaux De Change (BDCs) and meeting other dollar obligations for the government, businesses and populace.

Today, oil sits at $46.39 a barrel. Goldman Sachs recently agreed it could tumble as low as $30 a barrel, a level that would decimate the already heavily damaged economies of Nigeria, Saudi Arabia and Russia. The Organisation of Petroleum Exporting Countries (OPEC) predicts the price won’t go back above $100 until 2040.

These weak economic indicators and forecasts have continued to put the local currency under severe pressure from internal and external factors. Still, the CBN is not giving up, except that its measures seem overboard, with varied implications for inflation and purchasing power of Nigerians.

Other stakeholders have explained what is playing out in the Nigerian forex market. They said the continued diversion of export proceeds and Diaspora remittances inflows to the parallel market are weakening the naira.

Trading Desk Manager, AZA, a global forex trading firm, Murega Mungai, said the depreciation of the naira will continue until there are regulatory sanctions against illegal forex dealers, especially exporters who fail to remit export proceeds to government coffers as spelt out in the CBN’s Foreign Exchange Manual.

The manual provided that all exporters should repatriate export proceeds back to the country to support the local currency and boost the economy, but compliance with the guidelines has become a major challenge.

The CBN has been monitoring non-oil exporters, especially airlines and shipping firms, and assessing their compliance with the export proceeds repatriation policy.

In a circular to authorised dealers, Nigerian Customs Service, (NCS), Nigerian Shippers Council (NSC) and other stakeholders, CBN Director, Trade & Exchange Department, O.S Nnaji, said the bank had observed with dismay, the non-compliance by shipping and airline companies to its directive on export proceeds remittance.

The CBN also directed all banks to submit the names, addresses and Bank Verification Numbers (BVN) of exporters that have defaulted in repatriating their exports proceeds, for further action.

Nigeria also receives over $25 billion annually from Diaspora remittances, mainly from its citizens living or working in Europe, America and Asia. The Diaspora remittances also being diverted to parallel market have for years remained the backbone of the naira by deepening market liquidity.

In a report titled: “Christmas Stocking Is No Gift for Naira,” Mungai said many companies and individuals are diverting export proceeds and remittances away from approved channels while directing unmet dollar demand to the parallel market.

He disclosed that as dollar scarcity continues to linger, the naira will come under more pressure that will weaken its value against other global currencies.

“The naira traded as low as N500 to the dollar as Nigeria recorded its worst recession in three decades, with the economy shrinking 3.62 per cent in the third quarter as a result of lockdowns, border closures, currency restrictions and protests. The dollar demand pressure continues to weigh in from importers stocking up for Christmas sales,” Mungai added in an emailed note to investors.

Also, dollar demand pressure has continued to weigh in from importers stocking up for Christmas sales and finding it difficult to source from the official market, are directing their demand to the parallel market. Shipping and airline companies have also been accused of depriving Nigeria of the much-needed dollar earnings by not remitting export proceeds.

Regulatory, banks’ controls to keep naira stable

The CBN never stood idly watching the naira slide into oblivion. The regulator has taken certain stringent measures, including imposing some currency control measures to save the naira.

Firstly, it curbed access to the interbank currency market for importers bringing in a variety of goods. To conserve its dollar reserves, the bank said importers could no longer get hard currency to buy 43 items, ranging from toothpicks and rice to steel products and private jets.

The banks are also turning down payment requests from customers paying business partners abroad with naira debit cards.

They are now asking customers paying clients abroad to do so in the currency of the beneficiary’s country, not in naira. The new practice differs from the previous one where lenders debited the naira accounts of customers at the prevailing exchange rate and remitted dollar equivalent to the offshore beneficiary’s account.

The old practice was depleting foreign reserves and putting pressure on naira exchange rate against the dollar at a time Nigeria’s dollar earnings are on the decline due to low oil prices caused by Coronavirus pandemic.

Many banks not only insisting that customers pay in the currency of the recipient’s country but through inflows from abroad in line with CBN’s domiciliary account policy which directed that only electronic fund transfers into domiciliary accounts can be transferred from such accounts to third parties while cash deposits into such accounts can only be withdrawn in cash.

In an emailed explanation to a customer on why her transaction request was declined, GTBank said it was based on a temporary restriction is placed on Dynamic Currency Conversion (DCC) on all banks’ cards.

“Dear Valued Customer, Declined Card Transaction: DCC Restriction. Thank you for using your GTBank Naira MasterCard. Please be informed that your transaction with the details below could not be completed because you have selected the DCC payment option (Dynamic Currency Conversion) that allows you to pay in Naira, which has been temporarily restricted on all our cards. Please reattempt the transaction and select the currency of the country you are transacting in,” GTBank Card Services Team emailed one of its customers, Ndidi Obinna, who was paying for online advert placement on Facebook with her naira debit card”.

Likewise, Martins Obi was in Dubai shopping when he got news of CBN’s restriction on the use of naira debit cards abroad on Twitter. He quickly called his account officer in the bank to confirm the authenticity of the information, and his fears were confirmed.

“It was a very bad experience. I had to borrow from a friend to be able to make the payment,” he said.

Thousands of bank customers share Obi’s experience outside the country. Also affected were web-based businesses that require to regularly pay for server space and web hosting in Europe or America using their debit cards.

The Chief Executive Officer (CEO) of InvestAdvocate, Peter Obiora, said the policy shift has made it difficult for him to pay for server space for his online web business. He said unlike previously when he could use his debit card to pay for such transactions to be approved, now, the card must be linked to a dollar-denominated domiciliary account that must be funded locally.

Former Executive Director, Keystone Bank, Richard Obire, said that just like a coin, the debit card restriction has two sides because Nigeria is integrated into the global economy, and her citizens should get intangible services that promote businesses. The use of naira-denominated debit cards abroad, he said, is one of such benefits.

He said that instead of making a blanket restriction on card use abroad, the CBN and other commercial banks should look at the countries where the biggest volume of forex is spent, and what it is being used for. Obire said Nigeria still gets over $25 billion annually from Diaspora remittances and other forex inflows from other sources.

The Managing Director, Afrinvest West Africa Plc, Ike Chioke, believes the incorporation of a long-term diversified strategy in fiscal policy is required to cushion shocks in various segments of the economy.

For him, the persistent pressure on the naira could have been minimised if a counter fiscal policy had been developed, as the CBN cannot continue to defend the naira with foreign reserves.

“To reduce this pressure, an inward-looking policy (tax incentives, infrastructure development and production subsidy) should be emphasised to reduce the dependence on imported goods”, he said.

He explained that asides from oil receipts, the development of the Agricultural sector will in the short term reduce the forex burden of food imports and on the long run, enhance foreign receipts if its comparative advantage in the sector is efficiently deployed.

President, Association of Bureaux De Change Operators of Nigeria, Aminu Gwadabe said regulatory sanctions against authorized dealers- banks, BDCs or other financial institutions will help to check forex abuse. He said that aside from financial fines, operating licenses of forex violators should be withdrawn by the apex bank as a deterrent to others.

CBN’s position

CBN Governor Godwin Emefiele explained the dilemma faced by his team in keeping the naira stable and factors making the teams’ work challenging.

He said the COVID-19 pandemic played a negative role in getting the naira to the sorry state it is today. The pandemic pushed foreign investors to withdraw over $100 billion from emerging markets including Nigeria, between February and April this year.

It was the impact of the pandemic and the resulting slowdown in economic activity that led to a significant outflow of funds from developing economies.

Emefiele said the funds were subsequently invested in safe-haven assets such as US treasury bills and the Japanese Yen. The increase in outflows from emerging markets also led to a corresponding depreciation in the currencies of several emerging market countries such as Brazil (- 27.3 per cent), Turkey (-35.1 per cent), Argentina(-35 per cent), Russia(-20 per cent), Angola(-27 per cent) and South Africa (-9 per cent) year to date.

Like other developing economies, and countries reliant on oil exports, the decline in crude oil earnings as well as the retreat by foreign portfolio investors significantly affected the supply of foreign exchange into Nigeria.

To adjust for the decrease in the supply of foreign exchange, the naira depreciated from N305/$ to N360/$ and subsequently to N379/$.

With the decline in Nigeria’s foreign exchange earnings and successive exchange rate adjustments, the CBN continued to implement a demand management framework, which is designed to bolster the production of items that can be produced in Nigeria, and aid conservation of our external reserves.

Also, due to the unprecedented nature of the shock, we continued to favour a gradual liberalization of the foreign exchange market to smoothen exchange rate volatility and mitigate the impact which, rapid changes in the exchange rate could have on key macro-economic variables. This we believe is in line with international best practices in countries where managed float arrangements are in operation.

Measures equally being taken by the authorities to improve our non-oil exports and other sources of foreign exchange. These measures have helped to prevent a significant decline in our reserves. Nigeria’s external reserves currently stand at $35.6 billion and are sufficient to cover seven months of import of goods and services.

Besides the dwindling crude oil prices and reduced forex earnings, the decision by the CBN to peg the naira in the official market, resist further devaluation, lower interest rates and increase credit to the real sector, has heightened the exchange rate crisis.

Although pundits’ debate whether the naira is overvalued or undervalued, the real issue is that the CBN’s control of the local currency prevents it from being responsive to economic fundamentals.

While every economy is controlled in some way, the CBN’s refusal to allow the exchange rate and other relative prices adjust to terms of trade shocks seems to be disrupting the country’s fundamental economic structure.

Conclusively, Nigeria’s current managed floating exchange rate regime combines features of both the fixed and flexible exchange rate. A lightly managed floating exchange rate regime is advocated given that the exchange rate becomes determined essentially by demand and supply forces. This would allow the CBN to intervene occasionally to moderate excessive fluctuations, which are prone in developing countries, including Nigeria.

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