Confronted by recalcitrant market forces, the Central Bank of Nigeria (CBN), recently, devalued the naira, thereby putting an end to the battle with speculators that create jitters in the foreign exchange market.
Nigerians have always detested devaluation of the naira as it is obvious that such steps would put more pressure on the economy and trigger inflation, especially since the country is largely import dependent.
The situation, no doubt, was also propelled by the ravaging global coronavirus pandemic and the crash in the price of crude oil, dealing blows on other aspects of world economies. Before taking the current step, records show that the naira had witnessed relative stability, moving within a narrow band of N359- N370/$ since mid-2017.
This period of naira stability was preceded by the introduction of the Investors and Exporters FX window in April 2017 and supported by a notable recovery in global oil price (2017 Brent price: +16.0 per cent YoY to $54.77/barrel), following the collapse of the latter in 2016.
The CBN had successfully maintained relative stability in all segments of the foreign exchange market, which 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 drastically reduced food importation, which hitherto constituted a large chunk of the pressure on the foreign exchange market.
The step taken by the apex bank is, however, contrary to some expert opinion, which had allayed fears of possible devaluation of the naira this year, considering various strategies the CBN had adopted to ensure the nation is well-positioned to shore up funds. Even the Central Bank in January assured the public that market fundamentals did not support naira devaluation this time around.
It expressed dismay at speculative activities at the foreign exchange market from impressions that the CBN would devalue the naira, thereby triggering panic in the foreign exchange market.
To prove its seriousness at putting an end to the rumour, it revealed steps it was taking in collaboration with the Nigerian Financial Intelligence Unit (NFIU) and related agencies to uncover the unscrupulous persons and foreign exchange dealers, who were creating panic, promising that the full weight of monetary rules and regulations would be meted out to them.
However, the country’s dwindling external reserves coupled with the slump in oil prices had made analysts to predict that it was only a matter of time before the CBN would devalue the naira.
For instance, in a report last week, JP Morgan said it expected Nigeria to devalue its currency by around 10 per cent to N400 per dollar by the end of June.
The last two months have seen a major crash in global investments, which began with world second largest economy, China, which unfortunately has emerged the centre point of the deadly virus.
Being a major oil producer and an ally to China, it was expected that investment lockdown in the Asian country would directly permeate Nigeria’s economy.
The apex bank took this decision after all interventions in the market, such as imposing sanctions on errant operators and use of moral suasion to curb illegal forex operations did not sustain the exchange rate of N360. Although it had long been expected by experts with some advising against it, the apex bank had no choice than to do what is considered necessary if only it would put an end to frequent fluctuations in the foreign exchange market and also buoyed by the need to stabilize the naira at this critical time.
Buffeted by a number of factors including hoarding by some dealers, the naira, a week before the latest decision was taken by the apex bank, had crashed to N420 to the dollar.
This was attributed to the crude oil price, which fell drastically in the international market and this raised speculations among the BDC operators and Nigerians in general.
The movement was as a result of recklessness on the side of the operators when they wanted to speculate. In the current dispensation, however, the apex bank’s decision to merge the rates at both the Bureau De Change and Import & Export window at N380 to the dollar from N360 and N366.70 respectively, is an appropriate mechanism needed at the moment to boost investor confidence against the headwinds facing the economy. Good enough, and doing away with any form of preference, the new order is for the CBN to make the dollar available to dealers at N378, which would be sold at N380.
This would make it impossible for those dealing in illegal operations and speculators to be profitable. As devastating as the decision might be to some people, financial analysts are, however, of the opinion that the move is aimed at sustaining the interest of Foreign Portfolio Investors (FPI) in the country’s financial instruments.
We have to bear in mind that the fear of coronavirus spread and unpredictable outcome in the short and long term have continued to impact on FPIs, indicating that the turmoil in global financial markets, occasioned by the coronavirus (COVID- 19) is beginning to affect inflows into Nigeria.
For now, since no one can predict the final outcome of the current economic lockdown, this is the time for all Nigerians to guard against policies that would further cripple the economy. We also believe it’s time management of the apex bank dealt decisively with foreign exchange dealers who have formed the habit of speculating and triggering panic in the economy.