The naira was Africa’s worst performing currency in 2016. In the closing weeks of February the naira suffered its greatest humiliation in the parallel market as it tumbled to a record low of N520 to the dollar.
The tacticians in the exchange rate war room of the Central Bank of Nigeria (CBN) then knew that the naira was probably heading in the direction of the Zimbabwean dollar. The CBN offered $1 million weekly to each of the 21 banks to ease supply deficit. With $600 million pumped into the spot market, the naira responded with a 13 per cent appreciation in the parallel market within one week. By the end of February, it was trading at N445 per dollar.
The naira has been the casualty of gross exchange rate mismanagement by the CBN. On paper, the apex bank is as independent of the executive arm of government as the judiciary and legislature. But in practice it lacks the autonomy of the legislature.
It can hardly devalue the naira without the assent of the president.
That has been the major handicap of the apex bank. The presidency clings tenaciously to the weird perception that an import dependent economy like Nigeria cannot benefit from currency devaluation since it simply fuels inflation. It took several months of arguments to convince the presidency that fixing the exchange rate of the naira at N197 to the dollar was choking forex supply.
By the time the presidency grudgingly agreed to ease CBN’s merciless grip on the exchange rate of the naira, the damage had been done. Investors merely regarded the official rate of N305 to the dollar as yet another artificial rate devoid of the dictates of the invisible hand of the market forces of demand and supply on the price mechanism.
That perception engendered the emergence of half-a-dozen exchange rates of the naira leaving a yawning gap between the official and parallel market rates. By the middle of February, the gap had widened to a record N220 per dollar.
Ironically, the parallel market rate is a monstrous caricature of the weakness of the naira. The purchasing power parity of the naira cannot put its exchange rate above N320 to the dollar. But the naira was trading at the parallel market at N520 because of speculation by desperate end-users who were willing to pay anything to avoid saving in a tumbling currency.
It was clear to investors that the naira would only be weaker the next day. They scrambled to dump it.
Last week’s decision to allow banks to bid at a rate higher than N305 under the Financial Market Dealers Quotation (FMDQ) has technically devalued the naira to a level that the CBN would have minimum stress funding forex demand.
At the official rate of N305 to the dollar, demand was just pilling against CBN’s lean supply. Now the apex bank would mop up more naira with the purchase of each dollar at a higher rate.
The apex bank opened the deal by offering to clear the huge backlog of forex demand. The improved funding is a big booster that conjured an earthquake at the parallel market. The naira would continue to appreciate if the funding is sustained.
Though CBN remains the market maker in the FMDQ, the expectation is that the liberal exchange rate would lure foreign investors to bring in dollars and ease the crippling supply deficit in the market.
Foreign investors had refused to enter the economy because they were convinced that somewhere along the line, the CBN would see economic logic and allow the naira to find its level.
Now that the CBN is willing to play ball, the massive depreciation of share prices in the Nigerian Stock Exchange (NSE) might gradually ease as foreign portfolio investors grudgingly return to the market.
Ultimately, the naira can only appreciate if current developments in the oil market are sustained.
With the Organisation of Petroleum Exporting Countries (OPEC) and other oil producers now determined to enforce the production cuts that would ease the supply glut in the international oil market, there are strong indications that the current oil price of $56 per barrel might be sustained. OPEC hopes to even push it to $60.
Even with oil prices at $56, the rulers of Nigeria would have to calm frayed nerves in the Niger Delta to inch up production.
In 2016, production averaged at 1.4 million barrels per day (mbd). The low production which was engendered by militancy in the Niger Delta and low prices which averaged at $40, combined to push the economy into recession. It also sent the naira tumbling at the parallel market as CBN’s inept exchange rate management worsened a bad situation.
Right now, things are looking up. Oil production has inched up to 2mbd. The CBN has built up the country’s reserves above $29 billion. If by a stroke of luck the gunmen in Niger Delta allow production to hit 2.2mbd, the naira might as well inch up to N390 to the dollar in the parallel market.
If that happens, the doubting Thomases in the presidency would have learnt a few lessons in the logic behind flexible exchange rate.
