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CBN expected to flood market with dollars in response to currency crisis

Plans have been finalized by the Central Bank of Nigeria (CBN) to stop the naira’s relentless decline versus the dollar.


One of these strategies, which was discovered on Monday, is to flood the market with cash.


A CBN board member, who spoke to our correspondent under anonymity, said: “At this point, the bank is going to inject foreign exchange into the market to stabilise the exchange rate.


“It will be a desirable thing, and that’s the essence of having reserves to stabilise the naira at any point in time.”


The board member noted that previous interventions by the CBN included putting money into the foreign exchange market when required.


He added that the decision is “a management routine function”, adding: “It’s a desirable thing to help the naira at this point.”


The CBN board member argued that to stop the naira from further haemorrhaging, the advisable thing is “as much as possible to flood the market with foreign exchange”.


“I am sure this government did not want any demand management policy, but such policies are also called for at this point.


“If they are operating a free market, the demand is overwhelming and you need to manage that demand, restrict that demand with certain policies.


“Foreign exchange availability is very limited, so the problem requires to be tackled from both the demand and supply sides.”


The naira yesterday closed at N744.41/$ at the Investors & Exporters (I&E) window and N935/$ at the parallel market.


The naira has lost over 40 per cent of its value since June when the Central Bank of Nigeria (CBN) adopted a unified exchange rate structure and collapsed all rates into the I&E window.


Data from the FMDQ Exchange showed that market turnover at the I&E window hovered around $60 million to $80 million throughout last week, which is considered a low liquidity position for the market.


Also yesterday, the Acting Governor of the Central Bank of Nigeria (CBN), Mr. Folashodun Shonubi, confirmed that a raft of measures will be unfolded to stabilise the naira.


He said President Bola Ahmed Tinubu had given his support to those measures.


But he declined to announce them while speaking with reporters at Aso Villa after meeting with the President.


Shonubi attributed the fate of the naira to the unwholesome activities of currency speculators.


According to him, the government’s hammers would soon fall on them.


Shonubi said: “Mr President is very concerned about some of the goings on in the foreign exchange market.


“One of the things we discussed is what could be done to stabilise the naira and what could be done to improve the liquidity in the market, as well as the goings on in the various other markets, including the parallel market.


“He’s concerned about its impact on the average person, since, unfortunately, a lot of activities that we do, which are purely local, are still referenced to exchange rates in the parallel market.


“We’ve discussed and I’ve shared with him what we’re doing to improve supply.


“If you look at the official market, you’ll find that that market has been fairly stable and the spreads of the difference have not fluctuated as much.


“We do not believe that the changes going on in the parallel market are driven by pure economic demand and supply, but are topped by speculative demand from people.


“Some of the plans and strategies, which I’m not at liberty to share with you, means sooner rather than later, the speculators should be careful because we believe the things we’re doing, when they come to fruition, may result in significant losses to them.


“But my presence here is more about the concerns of the President and we are doing something about them, assurances of which I have given him.


“So I hope this helps. We are looking at it and we’re doing things that will significantly impact the market in a few days and we will all see it.”


How to stop the Naira slide

The depreciation of the naira at official and parallel markets has triggered a series of reactions from economists, financial market experts and forex dealers.


They identified the dollar supply gap as one of the biggest triggers for the slide and suggested ways to firm up the naira.


Economists and financial market experts like Managing Director, Economic Associates, Dr. Ayo Teriba; Nigeria Country Representative, European Organisation for Sustainable Development, Jide Akintunde; former Registrar, Chartered Institute of Bankers of Nigeria (CIBN), Dr. Uju Ogubunka; President, Association of Bureaux De Change Operators of Nigeria (ABCON); Dr. Aminu Gwadabe and Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, gave insights on the state of the naira and way to reverse its slide.


Dr. Teriba listed two components of the forex reforms that needed to be addressed before the unification of the exchange rates.


He said there was the need to recognise that the challenge with the forex market is supply-shortfall related and to take critical steps to bring market and regulatory transparency.


Teriba said the government should look at ways to boost dollar supply, including allowing foreign investors to take equity and national assets to raise dollars that would boost naira.


He also called for a competitive forex market, where everyone is on a level playing field.


“Aside from the banks, other players in the market, including bureaux de change operators, should have equal access to the market.


“Banks are not licensed to trade forex, but the CBN has given them that role, and excluded BDCs that have the right license for the transactions.



“There should be freedom of entry and exit for even Fintechs to play in the market, and every dollar earned will add to the market liquidity,” Teriba advised.


The Economic Associates boss said the CBN operates with so much opacity, that it is difficult to see what the regulator is doing. “The lack of transparency in the market is not fair to the BDCs. The government will do well to restore regulatory integrity, including ensuring that any CBN staff member with a BDC license is identified and sanctioned because of conflict of interest,” he said.


According to Teriba, the apex bank also needs to abolish the list of 43 items it designated as not valid for forex.


He said everyone should have equal access to forex unless the National Assembly passes a law stopping such operators from accessing forex.


Dr. Ogubunka said Nigeria’s trade balance has been weakened by its inability to produce and earn forex.


He said Nigeria must find new ways to boost production to earn more dollars and boost foreign reserves.


Ogubunka, who is also the President of the Bank Customers Association of Nigeria, said that aside from boosting production, there is a need to tackle insecurity to allow farmers to go to their farms.


Rewane said it is expected that the benefits of ongoing forex reforms will crystalise later.


In an emailed note to stakeholders, he said external reserves will remain constrained as oil prices sustain their bearish outlook.


He said: “Exchange rate management goes beyond exchange rate unification. It must address issues surrounding market structure, easy access and adequate supply. This means effectively dismantling forex rationing and administrative controls, and reviewing import restrictions. As Barack Obama declared, ‘Africa doesn’t need strongmen, it needs strong institutions’.”


He added that the new exchange rate framework is expected to increase transparency in the forex market, reduce exchange rate misalignment and transaction costs, and buoy investor confidence.


Gwadabe called for stiffer measures on dollar trading platforms as they have become a conduit for diaspora remittances diversion.


He called for the review of the financial architecture to include BDCs in the harmonised forex market.


Gwadabe said there was a need to encourage market participants to source forex from independent windows to boost liquidity.


According to him, exchange rate unification can only thrive where the market participants are given an enabling environment and all players are treated fairly and equally for the sake of transparency.


Akintunde said the long-term causes of the weakening of the naira have been the dip in productivity in the economy, poor market governance, and outright corruption.


“Unless these three issues are addressed, Nigeria will never be able to harness the benefits of a market exchange rate and manage its risks.


“It is possible to begin to address these issues immediately, and with that stability in the exchange rate would be archived over the medium- to long-term,” Akintunde said.


Professor of Capital Market and Head of the Securities and Investment Management Department at Nasarawa State University, Keffi, Prof Uche Uwaleke said the government can take advantage of the current rise in crude oil price to ensure that the country earns more forex by dealing with crude oil theft and ramping up oil production.


“The CBN can then use increased FX inflows via crude oil sales to intervene in the FX market to stabilise it as quickly as possible.


“One measure the government must avoid in dealing with the FX challenge is to approach the International Monetary Fund (IMF) for any bail-out facility.


“Medium to long term measures should include ensuring that the refineries are revamped as soon as possible to reduce the import of PMS and associated demand pressure.”


Professor Uche Uwaleke urged President Bola Tinubu to “quickly set up the fiscal and monetary policies coordination committee”.


Among the tasks of this committee, he said, is to review the CBN’s RT200 programme designed to attract about $200 billion over the next few years.


“This has become necessary because its implementation will be difficult without the cooperation of all the stakeholders including the fiscal authorities since the CBN does not control the ports, shipping companies as well as other enabling infrastructure.”


To restore confidence in the FX market in the medium term, Prof. Uwaleke said: “It is vital that rising inflation is checked.


“To this end, the government should invest in productive activities to tackle supply-side induced inflation, which is fueling currency substitution and demand for dollars because the naira is losing value by the day.


“The emergency declared on food production is a step in the right direction. But this can only be effective if the state governments fully cooperate.


“Furthermore, improving ease of doing business will go a long way in attracting capital inflows and stabilising the FX market,” he proffered.


Also speaking to the issue of a fast-falling Naira, Dr. Victor Adoji, a market, economic and context analyst and former banker, said: “For as long as demand outstrips supply in the Nigerian forex market, the naira can’t appreciate against the dollar considering that we do not make enough dollar income from international trade and commerce.


“The government and its administrators who are the greatest non-economic users of dollars must do some housekeeping. While at that, the areas of heavy use must be identified and mitigated.


“The system of buying dollar remittances at a fixed rate should be returned because no rational being will buy at the official rate with such a huge margin in the parallel market.


“In the end, there must be a short, medium and long-term programme for returning value to the naira, which will include getting our refineries to work, frowning at foreign consumption, including holidays overseas, as well as spending on foreign/overseas education to mention, but a few.”


 

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