· Official Forex Market records $12.66 billion in sales in 3 months
· Analysts praise monetary policy reform, call for fiscal support measures
James Emejo of Abuja and Nume Ekege of Lagos.
The Central Bank of Nigeria (CBN) appears to have finally put down perhaps one of the most draconian and multi-pronged attacks on the naira in recent times.
This is based on data compiled by THISDAY on the daily trading volume of the Official Nigerian Autonomous Foreign Exchange (NAFEM) from January 18 to April 18, 2024, which shows that the market had a total trading volume of 12.66 billion during the three-month period. This is similar to the announcement that the trading volume of US dollars has increased.
Trends in daily sales data show fluctuations in amounts, with some days recording relatively low sales and other days recording higher amounts.
However, the survey results showed that sales increased significantly in February, and there were some days when sales were unusually high, especially towards the end of the month.
Following a series of reforms launched by the apex bank to clean up the foreign exchange (FX) market at the beginning of President Bola Tinubu’s administration, the local currency has come under direct attack from attackers, who were primarily currency speculators. Ta.
When Tinubu took over in June last year, the official exchange rate of the naira to the dollar was around N465.07/$1, despite his promise to achieve a unified exchange rate as opposed to multiple exchange regimes. was. he had inherited.
The president blamed the country’s economic woes and currency problems on flawed central bank policy and immediately approved new measures aimed at stabilizing the currency sector.
One of the major reforms introduced by the apex bank was the floating of the naira, which immediately opened the floodgates of vulnerability to the local currency.
Until foreign exchange markets were finally liberalized, past leaders of central banks were under intense pressure to allow local currencies to float to find their true value. However, the central bank has instead chosen to adopt a managed floating regime, which intervenes in the market on a case-by-case basis.
The apex bank’s reluctance to move the currency was largely due to the fact that the country remains heavily dependent on imports and the move could trigger a liquidity crisis.
However, following the liberalization of the exchange market, where the forces of demand and supply determine the value of a currency, the value of the naira has fallen significantly in a series of devaluations.
As of June 21, 2023, the local currency traded at 763 Naira/Dollar on the official counter, depreciating by 38.7%, equivalent to the parallel market rate.
The confidence crisis resulting from the accumulation of unsettled foreign exchange liabilities, especially amidst anticipated liquidity challenges, also limited the viability of the local currency.
As of February this year, the naira’s woes continued amidst the high inflation environment and its associated impact on the prices of goods and services, depreciating to around 1,800 naira to the dollar on the parallel foreign exchange market.
Analysts at one point called for a reversal of monetary policy to address the economic hardship caused by policy choices.
However, the CBN began liquidating the genuine foreign exchange balance, which was initially estimated at about 7 billion naira but was reduced to about 4.5 billion dollars after requests for more than 2 billion dollars were found to be fraudulent. It appears that a breakthrough has been achieved. In addition, the government has started selling dollars to foreign currency exchange companies, which had previously been prohibited, and lifted the ban on 43 items that were prohibited from accessing FX from the official market.
The resolution of outstanding foreign exchange debts has boosted the confidence of domestic and foreign investors, especially portfolio investors who have since injected large amounts of liquidity into the market to shore up the beleaguered naira.
The local currency has since returned to favorable conditions and is currently trading at around N1,100/$, with hopes that the naira’s strong performance will have a positive impact on the economy.
Just recently, Goldman Sachs in a report predicted that Nigeria will be ranked as the world’s fifth largest economy by 2075. The report also predicted that Nigeria would become the world’s 15th largest economy by 2050.
The world’s top investment banker also predicted the country’s GDP would reach $13.1 trillion by 2075, further cementing its position as Africa’s largest economy.
The forecast puts Nigeria ahead of Pakistan in 6th place, followed by Egypt (7th), Brazil (8th), Germany (9th), UK (10th), Mexico (11th), Japan (12th) and Russia. (13th), the Philippines (14th), and France (15th).
Analysts believe this feat was achieved due to increased liquidity and aggressive monetary tightening policies introduced by CBN Governor Olayemi Cardoso. He has raised the monetary policy rate (MPR) by 600 basis points since he took office to achieve price targets. Stability.
The naira’s massive resurgence continues to garner praise from analysts who praise the apex bank’s recent monetary policy direction.
However, they also expressed concern that without commensurate policy action by fiscal authorities, current gains may become unsustainable in the long term.
Analysts who spoke to THISDAY stressed the critical importance of increasing dwindling oil production, the importance of diversifying the economy to increase foreign exchange earnings and stimulating non-oil exports. Emphasized gender.
He also hoped that recent interest rate hikes and the current push to recapitalize the banking industry could further spur foreign exchange inflows.
The Group Chief Executive Officer of Cowley Asset Management, Mr. Johnson Chukwu, stressed the need to improve oil production to sustain the naira’s current gains.
He said this today: “Without improving oil production, it will be difficult to sustain the current profits in the naira. Naira profits are driven by withdrawals from the central bank and DMOs, who together have about 12.7 trillion yen. There are also overseas portfolio investors who are benefiting from low exchange rates and high interest rates.
“Thus, these are not sustainable measures. The sustainability of keeping the naira strong or even improving is whether we can improve our operating cash flow or our operating foreign currency cash flow. And Nigeria’s current cash Flows remain in oil production for now.”
“Over the past three months, we have seen crude oil production decline consistently from a high of 1.64 million barrels per day in January to around 1.4 million barrels per day in March,” he said. Ta.
“The surest path to stability for the naira would be to significantly improve oil production, otherwise it would be difficult to sustain.”
Ayokunle Olubunmi, Head of Financial Institutions Ratings at Agusto & Company, also spoke of the need to diversify the economy and strengthen foreign exchange (FX) earnings.
He said: “This move comes as the CBN seeks to address the exchange rate appreciation. I have seen him involved.
“Those are all good things, but the truth is, if we are going to sustain this rise, what we have to do in summary is increase our exchange earnings, and we have to do the bulk of it on the fiscal side. It means that it must be done.”
“What we have seen so far that has helped us is actually overseas portfolio investments, those are short-term funds, and next year they may pull the funds.
“So anything that can drive exports and improve non-oil exports is because oil sentiment is down, and in the long run, while we look at oil exports, non-oil exports will be important.” Because it’s a low hanging fruit.”
Mr. Olubunmi said, “As a country, we have a lot more to export than oil. It would also be helpful to try to reduce the bureaucracy and challenges of exporting goods. Also, reforming ports to enhance exports would be helpful. should also be carried out.
“We also need to increase the purchasing power of Nigerian consumers because it is only when the economy is doing well that foreign direct investors will start flowing into Nigeria.
He said the planned bank recapitalization exercise would attract foreign investors and further support the naira’s appreciation.
According to him, “This is the amount that banks need to recapitalize. Many of them are expected to reach out to foreign investors as well. And GT Bank has stated that the amount it wants to raise is in US dollars. Therefore, we support Naira appreciation in the medium term as more capital flows in under the recapitalization process.”
Ronke Akinyemi, Head of Global Markets at Parthian Partners, acknowledged that recent monetary policy has had a positive impact on the naira.
He also emphasized the importance of promoting exports and effectively managing imports, as well as strengthening the trade balance to ensure long-term currency stability.
“Although the anticipated price reduction has been slower than expected, the recent appreciation of the naira is a positive development,” he said. The Central Bank of Nigeria (CBN) has played an important role in managing the value of the naira through foreign exchange reserve management, interest rate adjustment and various policy reforms.
“To further strengthen the naira, it is essential to promote exports, effectively manage imports and strengthen the trade balance. This will contribute to currency stability in the long run.
“Furthermore, ensuring stability and instilling confidence in financial markets can be achieved by strengthening the regulatory framework and increasing transparency. The announcement is a step in the right direction.
“Another important aspect is improving the efficiency of government spending and refining tax policy, which will help maintain the strength of the naira.”
