Nigeria’s naira takes another dive: The implications, the solutions to dollar shortage
By Oludare Mayowa
The Central Bank of Nigeria (CBN) in a surprise move on Friday adjusted the exchange rate of the naira at the foreign exchange market, effectively devaluing the local currency again for the third time this year.
The regulatory bank in a circular issued and signed by its Director of Trade and Exchange, O.S Nnaji directed International Money Transfer Organisations (IMTOs) to sell dollar to banks at N388, banks, in turn, will sell to the CBN at N389 per dollar effective from Monday November 30.
Down the line, the CBN will sell the dollar to Bureau de change operators at N390 while the BDCs are expected to sell to their customers at N392 to the dollar.
The adjustment in the exchange rate was in sharp contrast with what the CBN Governor Godwin Emefiele told the whole world on Tuesday while briefing the media on the outcome of the Monetary Policy Committee (MPC) meeting.
Emefiele had told the media that the CBN will not determine the official exchange rate base on the performance of the parallel market which he tagged illegal and shallow, representing less than five percent of the domestic market.
Before the CBN governor’s clarification, there were market speculations that the regulatory bank may devalue the local currency rate of exchange before December in a bid to align all segments of the market.
The speculation was not unfounded after all, considering the rapid depreciation of the local currency on the parallel market, which reached N495 to the dollar on Friday, down 7.37 percent month-to-date depreciation.
Officially, the CBN exchange rate stood at N379 as of the last count, but with the new rate announced for the other segments of the domestic foreign exchange market, the naira is expected to depreciate further at the official window in line with the new adjustment.
Analysts have attributed the reason for the weakening naira currency to the diversion of forex inflow from export proceeds and Diaspora remittance to the parallel market from the official channels.
Many exporters who want to maximize their earnings in naira term prefer to channel their dollar proceeds to the parallel market rather than through the official market, thereby depriving the CBN the dollar support to meet the surging demand at the domestic market.
The increased margin between the official and parallel market has continued to create arbitrage opportunities for people with dollars either through Diaspora remittances or export proceeds and the naira is the worst for it.
Apart from the remittances, the CBN dependence on flows from oil exports has continued to dwindle due to the impact of the Coronavirus pandemic on demand for crude oil and the subsequent global oil prices collapse.
A senior official of the CBN said the country’s foreign exchange buffer is currently under strong pressure due to the gap between the official and parallel market rate.
The official who declined to be named said the spread between the two markets have created room for arbitraging and hurting the economy.
Insiders said this may have been responsible for the adjustment in rate at that segment of the market to slow down pressure on the currency.
Nigeria, the eighth world’s largest crude producer depends largely on dollar flows from oil exports to support the economy, but the disruption caused by the Covid-19 on the global supply chain and productivity has reduced dollar inflow with a resultant effect on the country’s foreign exchange reserves.
“Any move by the CBN to permit sales to the BDCs at 390 would be seen as an adjustment in accordance with the greater flexibility on the I&E window, Razia Khan Chief Economist at Standard Chartered Bank wrote in an email response to the Global Financial Digest.
“This is in any case not far off from where the naira has been priced in retail auctions. So it’s a small adjustment, in keeping with the authorities’ pledge to oversee a harmonised FX rate,” Khan said.
But a number of people said the adjustment could mean much to many importers who have projected their cost based on the previous rate for dollar to purchase items in preparation for seasonal festivities.
They said the fresh adjustment could further push down the value of the naira on the parallel market to a new low since dollar scarcity persists and the adjustment does not translate to an increased supply of dollars from the CBN.
The adjustment in the foreign exchange rate by the CBN came in a day the finance and budget minister Zainab Ahmed said the government is concerned about the spread and is taking steps to address the issue of scarcity.
The minister told Bloomberg TV that “We hope to get to an even level very soon so the impact of the exchange rate will become moderated,”
Emefiele also on Friday at this year’s bankers’ dinner in Lagos attributed the dollar shortage currently being experienced in the country to the exit of offshore investors from the market and decline in crude oil earnings.
“Like other emerging market countries and countries reliant on oil exports, the decline in crude oil earnings, as well as the retreat by foreign portfolio investors, significantly affected the supply of foreign exchange into Nigeria.
“Restriction on global travel by land and air; along with the slowdown in commercial activities, led to a significant reduction in the demand for crude oil, which contributed to a 65 percent decline in crude oil prices between January and May 2020.
“The drop in crude prices, along with OPEC reduction of Nigeria’s production quota led to a significant decline in our foreign exchange earnings, along with a more than 60 percent decline in revenues due to the federation account,” CBN governor at banker dinner on Friday.
Nigeria’s foreign exchange reserves, currently at $35.4 billion have dropped about 3 percent since May when it climbed to 36.6 billion, after picking up from April lows when it was hit by fall in crude prices and Coronavirus pandemic.
At the end of the day, Nigeria is still stuck with dollar shortage, many importers, especially the manufacturers and other businesses would still have to contend with the shortfall in dollar supply compared to their needs and the economy could take the hit from the lack of enough dollars to purchase raw materials and machinery.
The other angle to this is that, with the low value of the naira, Nigerians will have to pay more for goods and services in the coming days with the dire impact on inflationary trend and cost of living.
The solution to the vicious circle is for the government to sustain support for local content growth and how Nigeria can earning more forex by increase non-oil export to boost dollar flow and reduce pressure on the local currency.
Without the proper adjustment in Nigeria’s earning capacity, the vicious circle of devaluation and depreciation would continue to plague our developmental purposes.