Was naira’s world record a fluke?

Mahmud Kirikasamma (not real name) is one of the over 100 personnel of the Central Bank of Nigeria (CBN) who were recently disengaged. 

In a conversation penultimate week with another disengaged staff, Idris Jimoh (not real name), Mahmud disclosed his plans to convert a considerable part of his savings from naira to dollar. 

When Jimoh asked Kirikasamma why he planned to do that, he replied, “Because this cheering rise in the value of the naira is not sustainable.” 

Kirikasamma is convinced that the naira will soon drop to N1,600/$.

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This conviction by the former CBN employee that the value of the naira will soon begin to depreciate again may not be shared by many Nigerians. However, millions of citizens are quite apprehensive and do not seem to believe that the recent sustained rise in the value of the Nigerian currency may not after all be sustainable for a long period. Those who hold this view cite a number of reasons.

The widely publicised statement about the syndicated $3.3 billion crude oil prepayment facility deal between the Nigerian National Petroleum Company Limited (NNPCL) and the Africa Export Import Bank (Afreximbank), whose objective is to help the federal government of Nigeria in its fiscal and monetary policy reforms aimed at stabilising the exchange rate market, may end up being a fluke. 

Part of the reason for this fear is that Nigeria had in the months of February and March, 2024 failed to meet its production quota.

And it is expected to pay for the Afreximbank loan by utilising about 200,000 barrels of crude being extracted. More so, the payment terms are believed to be skewed at a great disadvantage to the country.

Last month, a crypto-currency trading platform, Binance yielded to the pressure from the Nigerian government to discontinue all naira services in the country. This came on the heels of a clampdown on its operations and officials by Nigerian regulators.

The Special Adviser on Information and Strategy to President Bola Tinubu, Bayo Onanuga, had urged the CBN and the Economic and Financial Crimes Commission (EFCC) to take action against platforms that attempted to manipulate the value of the naira using crypto-currency exchange platforms.

Onanuga recommended that crypto-currency channels be outlawed in the country because “this bleeding of our currency will continue unabated,” according to a statement he posted on his X handle.

Two senior executives of Binance, a US citizen, Tigran Gambaryan and British-Kenyan, Nadeem Anjarwalla, were both charged and remanded in custody by the Nigerian authorities before the later escaped from Nigeria to Kenya. He was expected to be repatriated back to Nigeria after he was last week arrested by the Kenyan police.

Still in an effort to strengthen the local currency, the chairman of the EFCC, Ola Olukoyede, said on Tuesday that the commission had frozen 300 illegal forex accounts trading on a peer-to-peer platform.

Olukoyede explained that over $15bn passed through one of the forex platforms in the last one year, outside the financial regulations.

He said the EFCC took the action to ensure the safety of the foreign exchange market and protect the economy.

Also, only recently, media reports revealed that the country’s external reserves were excessively drawn, and there were speculations that the hastily drawn down reserves were utilised to stave off depreciation of the naira. Although the CBN governor, Yemi Cardoso, tried to deny that, many Nigerians do not believe him.

And just as the debate raged about the veracity of the claim by the apex bank governor, the news was broken on April 22, 2024, that the value of the naira fell “to a low of N1,234.49/$” at the NAFEM window, according to data obtained from the FMDQ.

That was a sharp depreciation from the official exchange rate of N1, 169.99/$ recorded on April 19, 2024. According to Nairmetrics, “The latest drop appears to coincide with the remarks of the apex bank governor, Cardoso, who stated that the intent of the bank was not to defend the naira, when asked about the sudden drop in external reserves by $2.16 billion between March 18 and April 15.”

In a seemingly panic reaction, the apex bank, on Tuesday released a circular to Bureau De Change (BDC) operators, notifying them of direct sales of US dollars at a discounted rate of N1,021 per dollar. The operators were told to sell to end users at N1,036/$.

In reaction to CBN’s directive, the naira, on April 23, depreciated in the Nigerian Foreign Exchange Market, NAFEM, to N1,300.15 per dollar, exceeding the parallel market rate by N45.15 as the instability in the forex market continues.

Data from the official trading platform of the FMDQ Exchange, a platform that oversees the Nigerian Autonomous Foreign Exchange Market (NAFEM) revealed that naira also lost ground to the greenback on Wednesday as it depreciated by 0.64 per cent or N8.37 to close business at N1,308.52 to the dollar.

This development coincided with the issuance of an International Monetary Fund (IMF) advisory to Nigeria, on the path that could lead to a sustainable stability in the exchange rate of the country’s currency. 

In prepping its advisory, the IMF noted that the cheer about the continuous rise in the value of the naira after the strong performances of the past few weeks “could be a pipe dream if Nigeria does not take on a fundamental approach to rejuvenating its economy,” warning that “the country’s economy could be at risk if it simply fails to produce.”

Short-term solution not sustainable – Experts

Daily Trust Saturday sought the views of some experts on the debate on whether or not the rising value of the naira that has been noticed in the past few weeks is actually sustainable in the long run.

According to the chief executive officer of Finance with Muktar, Muktar Mohammed, the action of the CBN is to provide a short-term solution to stabilise the naira in the forex market.

He said: “You look at the short-term, medium term and then long-term solutions. Now, the immediate term solution is to make sure you bring down dollar rate against the naira to make sure you maintain stability and ensure your rate doesn’t go as high as what we experienced some months ago. The immediate solution is also to increase stability in your FX market. And how do you want to create it? You create it with short-term measures like what the CBN has done. Look for inflow, hike interest rate and attract foreign portfolio investors into the market.

“Also include a lot of international organisations’ funding. Those are the short-term measures.

“The medium-term will be to come up with a product and go for Eurobond, which may be oversubscribed by foreign investors,” Mohammed said.

On the possible forex scarcity in a long-run, Mohammed said the CBN was looking for other means to attract investors by making commercial banks strong through the recapitalisation announced last month.

“Most of these banks will depend on forex from foreign investors that want to invest in Nigerian banks. Remember, Nigerian banks are one of the best performing in Africa, so those could be the medium-term solution. Medium-term solution also will have to play a major role because the CBN alone cannot create stability in the FX market. So, the physical side also has to compliment the CBN with its own strategy as we need both of them to operate in synergy.”

The chief executive officer of Cowry Assets Ltd, Johnson Chukwu, said it is impossible for the CBN to sustain this policy, given that we are not producing anything; our only major sources of earning foreign exchange comes from crude oil, and we have no control over its price.

He said the artificial gain we are witnessing in the FX market is only supported by monetary policy, which cannot sustain consistent capital flow into the economy

Chukwu said, “The fact that the monetary authority is intervening and selling $10,000 at a discounted rate to 1,583 eligible Bureau de Change operators means that the volume of intervention is not so much, it can only amount to $15.38 million, which is just like a drop in the ocean, given the size of Nigeria’s economy.

“We saw naira lost ground last week Friday and on Monday, so coming to the market to sell now at N1, 021/$ at a time where other exchange rate window like NAFEM is selling at over N1, 250 clearly showed that the naira is being subsidised by the CBN. It would be tough for the apex bank to sustain this measure without an improvement in the foreign exchange earnings by way of exports of other raw materials, apart from crude oil.

“Currently, the proceeds from foreign direct investment are very poor and diaspora remittances are on the decline. Given the limited sources from forex earnings, the CBN would soon run out of reserve.” 

On the projections by the IMF and other finance institutions, Chukwu said their assessments were inconsequential to the realities on the ground, adding that it is ridiculous for any institution (internal or external) to rate the naira as the best performing currency when it has lost more than 30 per cent of its value over a period of four months.

“The naira can only strengthen if we focus on the most important thing, like increasing crude oil production to, let’s say, 1.250 million barrels per day. And getting a long-term inflow of foreign capital, the naira could return to where it was last year or even better,” he added.

Ayodele Akinwunmi, Corporate Banking Division, FSDH Merchant Bank Limited, said what is happening in the forex market is based on the forces of demand and supply.

“The Central Bank doesn’t manufacture dollars, so we have to earn it through production and exportation of goods and services. Crude oil accounts for the bulk of our export earnings at the moment, and with improvement in crude oil sales as we are witnessing now, it is expected that the country would earn more forex to support the local currency.

“Another way of earning foreign exchange is through foreign portfolio investment (FPIs) or Foreign Direct Investment (FDIs) into equities and fixed income market, which has grown in the last few months on account of policies the CBN is implementing, like the increase in monetary policy rate, which has affected government securities, and foreigners partaking and earning high yields of those fixed income securities,” he said.

Akinwunmi aligned with the argument that the recapitalisation of banks by the CBN is another strategy to bring more forex into the economy.

He said foreign investment would be attracted into the banking sector, which means more supply of dollars through banking recapitalisation.

“Talks are ongoing between Nigerian banks and foreign investors, who are already taking positions in our banking industry.

“The new CBN directive that banks should not use dollars as collateral for naira denominated loans would allow for more dollar sales to the market and improve the value of the naira,” he said.

He said the government was also making efforts by clamping down on illegal miners, while many companies are now building refineries for local refining of solid minerals for export and bring in forex into the economy on the supply side.

On the demand side, Akinwunmi said initiative investment like the Dangote Refinery, which has started operating, would reduce the demand for foreign exchange because now, marketers are buying diesel, Jet A1 and petrol very shortly in naira.

“You know very well that fuel importation accounts for more than a quarter of our FX demand, and now that we can meet all those demands locally, with some modular refineries also coming up, the demand for foreign exchange will drastically reduce,” he said.

He added that with another World Bank loan of about $2.25 billion at a one per cent interest rate expected, there would be enough dollar supply in the economy to reduce the pressure on the naira. He also said that in a short while, the naira would be selling below N1,000/$.

Ambrose Omordion, the founder/chief research officer at Invest Data, said that for naira to maintain the current stability against the US dollar, the federal government must ensure that our crude oil export quota is maintained, while ensuring that we develop the value chain of our cash crops for onward export to the international market.

He said it was too early to pre-empt CBN policies, adding that by the end of the second quarter, we would know whether the policies are sustainable or artificial.

“With crude oil now selling above the benchmark set for the 2024 budget, it may be good for the government, the economy and the market in the long-run,” he said.

A former advisory partner and chief economist at Price Waterhouse Cooper (PWC Nigeria), Andrew Nevin, said that obviously, Nigeria needs foreign exchange to import things that cannot manufacture, like cell phones and other things that are required for the country to function.

“In order to finance that, we need the inflow of foreign exchange; and the most important source of Nigeria’s foreign exchange earnings is still crude oil proceeds; and obviously, the remittances from Nigerians in the diaspora.”

Nevin added, “The problem with defending a currency is that we haven’t seen oil production increasing; in fact, it has decreased with the latest available numbers in the month of March, which showed that oil production declined to 1.2 million barrels per day. It is difficult to solve economic issues without adequate revenue, that’s why the authorities must do everything possible to stabilise crude oil production.”

He said he expected stability in the foreign exchange market, urging the CBN to apply the resources at its disposal properly.

There’s limit to what the CBN can do – BDCs

BDC operators alluded to the fact that there is a limit to what the CBN interventions can achieve.

One of them, Ibrahim Tanimu, who is the chief executive officer Morison BDC Limited and the zonal secretary, North-Central of the Association of Bureau De Change Operators of Nigeria (ABCON), while declining to comment on whether the current trend in the foreign exchange market is sustainable, said despite that some speculators got their hands burnt recently, many of them still believe that what is going in the forex market is purely artificial, and in a short while “status quo will return.”

He said: “Sharp practices by some unpatriotic citizens were responsible for the recent decline in the value of the naira. Naira is depreciating because about five commercial banks last week embarked on bulk purchase of dollars from both registered and non-registered Bureau de Change operators.”

Tanimu, therefore, called on the CBN to put mechanism in place to monitor the unpatriotic action of some citizens, who are bent on undermining the laudable policies of the government.

He said the government only approved the sale of dollars with specifications “like Personal Travel Allowance (PTA), Business Travel Allowance (BTA) and others, but the demand in Nigeria is far more than that.”

Other demands, such as excessive importation, travelling for tourism, holidays, purchase of materials by traders and business people, are not provided for by the government.

“The only window available for this group of people is to patronise the unauthorised operators that still exist in the forex market,” he said.

He said the activities of online trading platforms were affecting the value of the naira negatively because their transactions were not captured by government authorities responsible for such role. He added that the exit of Binance was a respite for the naira, although the impact is minimal.