Th e hissing and gnashing of teeth in Nigeria’s foreign exchange market has shifted from the regulators and endusers to the operators of the market. Th e tacticians at the exchange rate war room of the Central Bank of Nigeria (CBN) had in the last two years been gnashing their teeth over the tumbling value of the naira. Th e end-users of forex grumbled each time the naira plunged to a new low. Only the operators were smiling to the banks.
Th e scene of the forex market changed last month and the momentum is surprisingly being sustained. Forex dealers, especially the ones in the parallel market are gnashing their teeth as they count their losses. Th e losses are massive. Th ose who hoarded forex bought at N480 to the dollar are now selling at N360.
When Godwin Emefi ele warned that speculators and hoarders in the market would regret their actions, the CBN governor’s threat was promptly dismissed as the ranting of a toothless regulator. Now the regulator has bared its fangs. Since the second week of February when the CBN intervention kicked in, no one has been able to stop the naira’s gaining streak.
It has appreciated from an all-time low of N520 to N360 to the dollar over a period of four weeks. Last week, the parallel market rate eff ortlessly converged with the bureau de change (BDC) rate. By the close of the week the BDC rate was higher than the parallel market’s. Th e strength of the naira in the last three weeks is derived from three key factors.
Th e fi rst is the tenuous peace in Niger Delta in the last three months. Th e gunmen in Niger Delta have, at least temporarily, sheathed their swords and allowed oil fi rms to repair the damages infl icted on pipelines in the last one year. Th at has translated to massive gains in oil production.
Maikanti Baru, the group managing director of the Nigerian National Petroleum Corporation (NNPC), recently said that production in Nigeria’s oil fi elds has surged to two million barrels per day (mbd) up from the abysmally low rate of 1.3mbd last year. Th ere are strong indications that Nigeria might hit its OPEC quota and 2017 budget reference production rate of 2.2mbd if the tenuous peace in Niger Delta is sustained. If the 2.2mbd production quota is attained, even if oil prices drop below $50, things cannot be as bad as they were last year. Th e second factor is the price of crude oil in the international market.
Compliance with the production cuts arranged by the Organisation of Petroleum Exporting Countries (OPEC) reached 97 per cent last month, thus fi rming up the price of crude. Even with the return of America’s shale oil producers as crude oil prices surge, oil price might not drop below $50 per barrel this year. With the gains in oil price and the possibility of hitting the oil production target of 2.2mbd, the upsurge in the nation’s foreign reserves could be sustained with minimum stress.
Th e CBN has built the reserves to $30.3 billion from a record low of $23 billion in October 2016. Th e message from the upsurge in foreign reserves is that the CBN can sustain its intervention in the forex market with considerable ease.
Th e third factor is the change in the CBN management of the exchange rate of the naira. Even as the naira has only depreciated minimally at the offi cial window since the commencement of the intervention, there is considerable fl exibility in the management of the exchange rate of the naira in the spot market.
Th e CBN allowed banks to bid for and sell dollars in the spot market at a rate determined by the market forces of demand and supply. At the close of last week, banks were selling dollars to end-users at the airports at N380. Consequently, the foreign exchange market is beginning to experience a measure of exchange rates convergence. Th e parallel market rate converged with the BDC rates last week and even dropped below it at a certain point. Th e yawning gap between the offi cial and parallel market rates which stood at an alltime high of N215 per dollar when the CBN kicked off its intervention policy has now narrowed to N74.
Feelers in the market suggest that if the oil production quota is sustained with prices fl uctuating within its current band, the parallel market rate might slip to N350 to the dollar. Th e truth is that the parallel market would remain for considerable time. No one has been able to eliminate the parallel market in a developing economy. Th e danger lies in a yawning gap between the two rates.
Th e yawning gap between the offi cial and parallel market rates was fueled by speculators attack on the naira and CBN’s rigid management of the exchange rate. Now that the apex bank is willing to show a measure of fl exibility in its exchange rate management, the naira can only appreciate.
Th e fundamentals of the Nigerian economy did not justify the free fall of the naira to N520 to the dollar. However, CBN would remain the major market maker until it is able to convince foreign investors that the confi dence and transparency it is battling to restore would be sustained.
