In a move aimed at averting an economic crisis in the country brought about by the coronavirus pandemic ravaging the world economy, the Central Bank of Nigeria (CBN) has sustained its direct intervention in the foreign exchange market to manage demand pressure and ensure exchange rate stability.
The deadly outbreak which first emerged in Wuhan, China, in December 2019, has spread to every continent, wreaking havoc on different markets. The Nigerian market is not spared of the shock. While Brent crude oil price which the nation’s 2020 budget was bench marked has plummeted significantly to its lowest in years (from $66.25 on January 2 to $33.85 on Friday, March 13), thus threatening the nation’s economy, the naira under severe pressure from speculators.
The Nigerian currency also crashed to N375/$ on Wednesday and N400/$ on Thursday at the Investors and Exporters (I&E) Foreign Exchange window, following panic buying caused by speculations that the CBN would devalue the naira, before rallying.
However, the apex bank quickly debunked the speculation that it was mulling devaluing the naira, maintaining that although the outbreak of the Coronavirus led to a global economic slowdown, fall in the price of crude oil, and less inflow of dollars into Nigeria, the associated public health concerns had also led to factory closures in China, substantial drop in imports, widespread travel restrictions around the world, and cancellation of many conferences, sporting events, business travels, and FX orders, the size of the country’s foreign reserves could withstand any shock and meet all genuine forex demand.
CBN’s Director of Corporate Communications, Isaac Okorafor, maintained that market fundamentals do not support naira devaluation this time around. He said the rumours were false, unwarranted and calculated to serve dubious and selfish ends.
“We, therefore, wish to state that we have begun a robust and coordinated investigation in collaboration with the Nigerian Financial Intelligence Unit (NFIU) and related agencies to uncover the unscrupulous persons and Foreign Exchange dealers who are creating this panic, and the full weight of our rules and regulations will be meted out to them.
“This including, but not limited to, being charged for economic sabotage. For nearly four years, the CBN has successfully maintained relative stability in all segments of the foreign exchange market, which has enabled investors, households and other economic agents to plan and to conduct their genuine foreign exchange transactions with relative ease.
“The introduction of several foreign exchange management measures side-by-side with complementary interventions in food production and manufacturing has drastically reduced food importation, which hitherto constituted a large chunk of the pressure on the foreign exchange market.
Also, while addressing journalists at the Presidential Villa on Friday, CBN governor, Godwin Emefiele, said anyone who has a legitimate need for forex would get it.
“What are we saying, you want to travel? – Which we don’t advise at this time, you will get foreign exchange to travel. Do you want to conduct business, import? You will get foreign exchange to conduct that import transaction.
“So for that reason, there is no need for you to rush – everybody wants to rush to the exchange to that door to but foreign exchange that you don’t even require at this time thereby leading to the spike in the price of the dollars.”
Emefiele said the apex bank is working with security agencies like the Economic and Financial Crimes Commission and Nigerian Financial Intelligence unit to find the people involved in creating panic.
“I can tell you that we will find them because they use accounts. We will find them and I will like to advise those involved to desist from it. But we are happy at this time that those who would have been affected by the panic being created by these speculators having read what we released to the market have now calmed down to say at least CBN has assured us that when we can get dollars to pay our school fees, we can get dollars to travel, you can get dollars to import our legitimate business we will get it.”
He said the sudden demand for forex was caused by “scrupulous individuals” as major manufacturing firms involved in raw material export to Nigeria have been shut down due to the coronavirus outbreak.
Buoyed by CBN’s prompt intervention, the naira regained strength against the dollar on Friday to exchange at N370/$.
While speaking with Business Hallmark, Managing Director of Cowry Assets Management, Johnson Chukwu, said that if the Coronavirus pandemic continues to adversely impact the global economy and oil prices maintain downtrend, the CBN would have serious challenge sustaining the naira.
“Based on the CBN disposition, they would not ordinarily want to devalue if they can avoid it. But the jury is still not out on how the current pandemic will end. If the low prices and low economic activities are sustained, it will be difficult for the Central Bank to hold on to the current rate,” he said.
He noted that among the options the apex bank has is to adjust the interest rate upward to lure local investors to invest in the fixed income market instead of converting their money into foreign currencies and attract more foreign investors into the market.
In the same vein, CEO of Zedcrest Capital, DayoHamzat, told Business Hallmark in an exclusive interview that the CBN was achieving the impossible by controlling interest, inflation and forex rates simultaneously, while not allowing the free flow of foreign currency transactions.
“The reality is it will be a big challenge for the CBN to keep the exchange rate stable because panic has set in, as every holder and businessperson is trying to speculate. This is out of survival, not necessarily to make money. People are still in the pain of what they went through in 2016; they are trying to see by how much they can reduce the impact of that pain when it comes again.
“Offshore investors still have about $8 billion in the Nigerian financial market, all of that is at the verge of going and new investments may be slow in coming because they believe the fair value of the naira is no longer N360. The fair value of the naira is probably between N420 to N450,” Hamzat said.
He concluded that if the oil price does not recover quickly, the naira will continue to be under significant pressure, advising the CBN not to punish the economy by continuing pegging the currency at N360.
JP Morgan had last week projected that the Central Bank of Nigeria may be forced to devalue the naira by about 10 per cent, saying it expects the exchange rate to be N400 per dollar by the end of June.
Last Friday the local currency exchanged N306.95/$ at the CBN official window; N374/$ at the I&E Forex segment of the market and N373/$ at the parallel forex market.
Meanwhile, an economist, Prof. Sheriffdeen Tella, urged the Federal Government to institute a long-term national plan that will strengthen economic diversification to enhance revenue generation.
Tella, Professor of Economics, Olabisi Onabanjo University, Ago-Iwoye, Ogun, said stated that the current global and economic realities had called for an urgent need for a long-term national plan that would highlight the path to economic diversification.
“It is high time we institute long term national plan that would highlight the path to economic diversification, a path to national saving in terms of the Sovereign Wealth Fund and path to national consumption such that we consume what we produce.
“The crash of the oil price and the resulting panic once again tells us how fragile the Nigerian economy is without diversification of production and sources of income.
“Unfortunately, both sovereign wealth fund and excess crude account that is supposed to provide a buffer for the revenue shortfall are down. So, what is to be done is to re-prioritise the projects in the budget for execution.
“If the present global economic problem is short-lived or temporary, suspended projects can be resuscitated,’’ Tella said.
Commenting on the committee set up by the president to review the 2020 budget, Tella said the committee was unnecessary.
He noted that the President’s economic team was supposed to be given the task of the present committee.
“The outcome of their output could be subjected to a discussion at Executive committee for eventual adoption,’’ he added.
Source: Business Hallmark