The Central Bank of Nigeria (CBN) has come up with measures to check the recurring slide in the value of the naira at the parallel market as well as the acute shortage of foreign exchange (fx). According to the Acting Governor of the CBN, Folashodun Shonubi, the volatility of the naira in the parallel market is not only driven by demand and supply factors, but also by speculative demand. The CBN boss is hopeful that the interventions will yield positive results.
Similarly, the Nigerian National Petroleum Company Limited (NNPCL) has secured $3billion loan from the African Export-Import Bank (Afrieximbank) to check the scarcity of forex. The loan, which will be released in tranches, will stabilise the volatile forex market, cushion the effects of naira slump, and support government’s fiscal and monetary reforms. The loan will be funded through crude oil swap to be delivered to the lender over a period of time. The loan will also enhance dollar liquidity and stabilise the naira with limited risks.
The shortage of forex has widened the difference between the official and parallel exchange rates, with the naira exchanging as low as N950/$ in the parallel market. This has further worsened Nigeria’s massive fuel importation, said to gulp about $20billion annually. The development has raised the pump price of fuel as high as N650/litre in many states.
For many months, the increasing demand for forex by end-users has piled pressure on the limited dollar available in the market. Unfortunately, the CBN was lax in its oversight on key monetary issues that would have halted the slide in the value of the naira. For instance, the unified exchange rate that ought to bridge the arbitrage gap between the Investors and Exporters (I&E) exchange window and the parallel market, did not succeed because the government failed to supply enough forex before the implementation.
This is why there is panic in the forex market, with speculators having a field day. The backlash on the economy is evident. Shonubi had at the end of the Monetary Policy Committee meeting, last month, said that the “market needs to find its level.” He claimed that “there is a pent-up demand, which the market cannot cater for.” The inability of the apex bank to address the persistent forex shortage is causing prices to surge. We believe that the value of the naira may continue to depreciate, and remain under the current intense pressure as long as forex remains scarce, especially with increase in import bills and a sharp decline in external reserves.
Besides, our economy has been largely import-driven and major transactions done in foreign currencies. This is having its toll on the country’s foreign reserves. Nigeria’s external reserves lost $167.2 million in July. Figures from the CBN showed that the reserves, which ended June 30, 2023 at $34.12billion, fell to $33.95 billion as of July 28, 2023. Worse still, the naira has lost an essential source of support. This is as a result of the release of the long- awaited financial statement of the CBN, which revealed that foreign exchange reserves at its disposal were much lower than previously disclosed. The accounts published recently showed an undisclosed $7.5billion in transactions with two US-based investment Banks, JP Morgan Chase &Co and Goldman Sachs Group Inc.
Also revealed, was a detailed exposure in foreign-currency forward contracts of almost $7billion. This means that the CBN vastly exceeded the limit placed on its lending to the federal government, totaling N22.7trillion through Ways and Means. Also, the CBN can enhance forex liquidity by changing the reserve requirement framework. Failure to tackle forex shortage could have dire consequences on the current efforts to halt the slide of the naira.
No doubt, the Tinubu administration started on a wrong note with the hasty removal of fuel subsidy and floating of the naira. Already, manufacturers are complaining about the negative impacts of the policies on the economy. The immediate impact is the higher borrowing rate. With the new cabinet in place, let there be policies that will spur growth and restore confidence in the economy. Let the government address the challenges bedeviling the economy.
