Experts Watch as Naira Stops One-way Slide

The meteoric rise in the value of the naira last week was astonishing, especially when pundits had forecast that a dollar may be exchanged for as high as N500 by the end of this month. Kunle Aderinokun and Olaseni Durojaiye, who have been keeping close tabs on the forex market, examine the trend and present the views of experts

Though the gains were reversed last Thursday with the dollar sold at N330, the naira staged a comeback earlier in the week in a form that many described as not only dramatic but also unprecedented. On a day (Wednesday) the International Monetary Fund once again categorically told the Central Bank of Nigeria (CBN) to remove restriction on forex, the naira was exchanged for the dollar at N250/$ from N310/$ it stood a day before.

The dramatic rise of the value of the naira started the previous weekend when the greenback was sold at N362 after rising to an all-time high of N391 some days earlier. Subsequently, the naira continued to gain strength. Like the proverbial cat with nine lives, the naira came back to life. But what could have breathed life into the naira?

Positive Fundamentals

The latest development on the naira may not be too surprising, after all, fundamentals are tending upwards. For instance, penultimate Friday, following suggestions that OPEC might finally agree to cut production to reduce the world glut, crude oil prices surged as much as 12 percent. Brent crude closed up $3.30 at $33.36 a barrel in New York after falling below $30 the day before.

Even though the prices came down a while after, it also went up few days later. And last Tuesday, as speculations were rife about falling U.S. shale output, oil prices (US crude futures) gained as much as 6 per cent or $1.84, or 6 percent, to close at $31.48 a barrel, rallying above $32 at one point. Besides, positive news is coming from the meetings by Nigeria’s President Muhammadu Buhari and King Salman Bin Abdul-Aziz of Saudi Arabia as both countries are now committed to the rebound of crude oil prices and stable oil market.

This was subsequent upon the agreement by Russia and Saudi Arabia to freeze production, which has given fillip to the prices of oil. The implication being that there was an accretion to Nigeria’s foreign reserves once after five months. According to the Central Bank of Nigeria (CBN), the reserves increased by $13 million from $27.793 billion previous Friday to $27.806 billion last Monday.

Analysts Greet Rebound with Cautious Optimism

While market watchers saw the sharp increase in value of the naira coming, even though not expected to have happened so fast, they are however of the opinion that the rebound may not be sustainable. According to them, the naira is still volatile. Besides, the dramatic recovery of the national currency was welcomed by operators in the real sector and some analysts, tracing the development to government’s resolve not to devalue the naira even as it faced so much pressure to do so.

Amidst calls to devalue, President Muhammadu Buhari argued at various times that the country did not have the competitive advantage to devalue and that he was yet to be convinced on the need to devalue the naira.

While the devaluation debate persists, analysts feared that going forward, the challenge of greater import costs on businesses was expected to further impact both the core and food inflation rates as cost push factors weaken operating margins amid demand pressure in the forex market.

Executive Director, Corporate Finance, BGL Capital Limited, Femi Ademola, notes that “the appreciation of the Naira against the US dollars from about N400/US$ on the 18th of February 2016 to N270/US$ on the 24th February 2016 has been anticipated although, the rate of the appreciation was faster than expected.” This, he points out, is because “the demand for the foreign exchange in the last few months has been largely artificial.”

Ademola explains that “since the declining oil price resulted in a lower value of the Naira exchange rate, it follows that an increase in oil price would also reverse the Naira exchange rate trend and the currency will strengthen against the dollars.” As such he believes “since the oil price has been firming up consistently over the last few days, it is not strange that the Naira is also gaining value.”

Pointing out that “this is not the first time that the IMF is advising the CBN to float the local currency and I think I agree with the idea,” he however, says he had also argued that “it should be a part of the whole economic plan which should include structural reforms and the provision of enabling environment for local production so as to increase exports and produce substitutes to the expensive imported goods.”

In essence, the BGL analyst attributes the appreciation of the Naira to “the improvement in oil price which leads to increase in supply of foreign exchange on one hand, and the reduction in speculative and artificial demand as the Naira exchange rate appeared to reach an unsustainable low level on the other hand.”

Speaking along the same line, former Chief Economist at African Finance Corporation (AFC) and CEO, Nextnomics Advisory Limited, Temitope Oshikoya, notes that “the same factors responsible for the sudden fall in the Naira were responsible for its rise: speculations and uncertainty, which tend to lead to exchange rate overshooting on both sides.” “Oil prices have fallen by about 70 per cent since June 2014. The official exchange rate was around N150 to the dollar around that time. A full and proportional effect would be a 70 per cent depreciation from N150 to about N250-265. On the other hand, using inflation differential approach and using the current level, the Naira should be around N220.”

Asking ‘why the run to N400?”, Oshikoya states that, “ it is the microstructure of the foreign exchange market that is being manipulated. Buy on the rumor, sell on the news.”

He lists the factors that led to the fall in the Naira to include: “kick out of the BDCs from sourcing dollars from the CBN, the rumour that school fees, medical tourism and travels would be kicked out from official sources, and the expectations that the MPC would devalue the Naira at its next meeting. On the other hand, he points out that, “the rise has been triggered by the pronouncements of President Buhari stating that read my lips: no new devaluation in the near future, the clarifications by CBN that schools fees and medical tourism are not yet excluded, and the efforts of the BDCs to clean their own act by trying to self-regulate their members to buy and sell within a band.”

To the CEO of Eczellon Capital Limited, Diekola Onaolapo, “the reason for the sharp rise in the value of the naira is as inexplicable as the sharp drop in its value last week.”

As such, Onaolapo adds: “We have no reason(s) to believe that the current gains are sustainable over the coming weeks. He recalls that in recent months, the value of the naira in the parallel market has largely been driven by activities in the gray market which is outside the purview of the formal/official economy. “That said, the intense volatility in the FX market is negative on the Nigerian economy. This is because it inhibits the ability of businesses and investors to adequately plan for new investments in the country due to the unstable nature of the naira.”

This, the chief executive believes, further reiterates “our call for the CBN to introduce a managed floating system for the naira, to allow the currency find a true and stable level that will promote stability and confidence in the nation’s economy.”

He argues that “the current pegging of the currency is not sustainable and it promotes arbitrage which rent seekers will continue to exploit at the detriment of the whole economy.”

Rebound Excites Real Sector

Also reacting to the rebound, President, Manufacturers Association of Nigeria (MAN) Dr. Frank Jacobs expresses delight, saying it is a welcome development. According to him, it means well for the real sector.

Exclaiming that, “this is good news! excellent news!,” Jacobs adds that, “all along I believe that the performance of the naira against the dollar was artificial. I believe some organisations and individuals hoard the dollar expecting that the naira will be devalued. Now that they realised that the President (Buhari) won’t toe that line they have started selling dollars.

“That is the only plausible reason for this kind of recovery. The people who stored dollars expecting devaluation now know better and are now selling what they have stored up in their private vaults,” he states.

On his part, Director-General, Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, welcomes the recovery, he however insists that the basic economic steps must be taken to normalise the forex market arguing that businesses cannot plan with the current scenario that is playing out in the forex market.

Yusuf says “It is still a volatile market; we need to allow the market to settle before making far reaching statements. I am not in a position to speak on what is responsible for this. However, we need to still address the fundamentals. Businesses can’t plan like this, economy don’t like this; we need to have a stable market. We need to take steps to normalise the situation.”

As for a renowned chartered insurance broker, Ayodapo Shoderu, “It must obviously have the hand of the government. To the best of my feeling, it is the intervention of government that is responsible for the recovery as a reaction to cries of the people.”

“We are happy that it has at least gone down to N250 to $1; we hope it will still go down a great deal more because Nigeria is no more an agricultural country, it used to be; we have shifted our dependence to oil and almost everything that is used or consumed in the country now depends on the price of the USD,” posits Shoderu, who was also the immediate past Chairman of Council, Nigerian Council of Registered Insurance Brokers (NCRIB).

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