Illiquidity hits new high as speculators tighten hold on FX

THE persistent currency crisis may worsen in the coming weeks as anti-market schemes, speculation and hoarding, are taking a stronger hold in the market.    

The value of the dollar surged last week as the initial speculation that the Central Bank of Nigeria (CBN) might have adopted the Nigerian Autonomous Foreign Exchange (NAFEX) rate for official transactions went viral. 

But the greenback retraced, following reports that the apex bank funded the Bureau de Change (BDC) last weekend at N393/$. The reports cast doubt on the adoption of the NAFEX rate otherwise known as investors’ and exporters’ (I & E) rate, as the default official change. 

The President of the Association of Bureau de Change Operators of Nigeria (ABCON), Dr. Aminu Gwadabe, warned that speculative traders could lose as much as N100 billion in the coming months if they failed to offload their hoardings.

Amidst the growing uncertainty on the adoption of the pseudo market rate, market operators started a momentary panic sale, leading to a slight value adjustment in favour of the local currency with the dollar retracing to N480/$ on the average. 

After the Tuesday confirmation of the new official rate (NAFEX), currency speculators have raised their game, hoarding and mopping up the market. Situation monitoring by Naija Times suggests that the naira could slip to over N500/$ next week.

The naira retreated to an average of N493/$ earlier today as traders at the black market engaged in aggressive buying. But an increase in the exchange rate is not as much of a challenge as the drastic decline in offer size. 

There are no statistics to measure the level of drop but a trader confirmed his colleagues have adopted a “wait-see-approach to sale” while they ‘stockpile’ as much as they can get in expectation of a rise in the exchange rate in the coming weeks.

But it is not only the market operators that are hoarding foreign currencies. Individual holders are similarly saving their currencies while those who have the means aggressively convert their naira savings to dollars in expectation of a more weakened naira.

  In economics, expectation equals reality. An expected rise in price is the same thing as a future price, including the exchange rate. Hence, experts are positively disposed to the stability of the naira in the short- to medium-term. But they believe if the fiscal misalignments are addressed, the currency could gain value in the coming years.

Dr. Bongo Adi, an economic researcher at the Lagos Business School, holds this view strongly. He warned that adopting the NAFEX rate as the official rate without addressing the fiscal challenges that have stunted this country’s growth would amount to reverse to the days of the Structural Adjustment Programme (SAP).

  “SAP failed and triggered a major currency crisis because there were structural challenges that were not addressed. Exchange rate adjustment cannot address the huge cost of governance and poor infrastructure, for instance. So, you can review the exchange rate upward and expect a miracle,” Adi noted.

 A market value naira, many people have argued, would make Nigerian commodities cheaper for other countries and thus raised export injections. But Nigeria can only export when it produces but insecurity, high cost of production, poor infrastructure, governance issues and many more have remained the encumbrance to converting the country’s population strength for a buoyant exporting economy as China has done.

Thus, the argument against devaluation, which NAFEX adjustment seems to imply, is a potential falling knife as a higher exchange rate has been, historically, an increasing function of inflation. Last month, the headline inflation-adjusted marginally from 18.17 per cent to 18.12 per cent, even though many economists dismissed the figures as unrealistic. Until April, month-on-month inflation has remained positive. There are fears that the coming months could be worse as the naira takes a beating.

What is the new adjustment is that it will lead to nominal appreciation as the benchmarked exchange rate for monetising the country’s earnings is from N380/$ to N410/$. It will potentially reduce the currency misalignment in relations to the currency of other countries, which has the potential to boost the country’s export value supposing it produces enough to sell at the international market.

But Godwin owoh, a professor of applied economics says Nigeria does not need more money but only needs to be more prudent. This argument makes a mockery of the nominal appreciation value that could come from more state earning or nominal appreciation. 

Yet, the three tiers of government can now look forward to a more wobbly Federal Accounts Allocation Committee (FAAC) as a constant foreign earning could give different volumes of naira since NAFEX is as stable as the now rested CBN official rate. 

 The adoption of NAFEX, notwithstanding, the FX crises are not over. NAFEX is not a clearing rate, says Dr. Ayo Teriba, a leading economist. Hence, it will not lead to the market equilibrium, which is required, to a sane FX market. The differential between NAFEX and the parallel market (which is the closest to market-led rate) is still about N80/$ and widening. Will NAFEX, thus incentivize the foreign investors enough, to want in the required dollar investments to achieve long-term stability in the FX market?

David Adonri, the Vice Chairman of Highcap Securities Limited, says what the country needs to address the historic challenge is a liberalised market where all players buy and sell currencies. A divergence market, like we currently have, will malign some players and not fit for economic purposes.