Destabilizing speculation

Who will save the Naira? – Nairametry


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Last week, the exchange rate between the naira and the US dollar closed at 411.67 N / 1, at the official window of investors and exporters. Meanwhile, the exchange rate in the parallel market where the majority of Nigerians attend fell to a new high on Friday to close at N / $ 1 545.

The naira has been devalued in the parallel market and many stakeholders have expressed concern about the scarcity of foreign currency. Some traders attributed the increase in the price of certain food items to the scarcity of forex, which affects the cost of importing. The overseas tuition season, the holiday season, the travel season is fast approaching, the demand for forex would only increase.

READ: Three things that could make the naira awesome again

As long as it is about the valuation of currencies and the naira, we go around in circles and when we take other paths we find ourselves in dead ends. Here is a brief timeline of events.

July 27: The Central Bank of Nigeria said the bank will channel more foreign exchange to commercial banks for consumers with legitimate needs.

July 28: The Central Bank of Nigeria halts foreign exchange sales to BDC and stops issuing and processing new licenses for bureau de change operators.

July 29: The Board of Directors General of Banks (CEOs) said the banking sector was ready to sell currencies and assured Nigerians “The rate will go down. Very soon you will be buying at N423 or N425 at most.

READ: As Naira crashes to N545 / $ 1, BDC operators urge CBN to collaborate

July 30: Naira won N8 as Banks’ bullish speech pushed the price from N525 to N517.

August 9, 2021: Naira was selling for N510 to the dollar as banks set up currency outlets at ATMs to meet customers’ currency needs.

August 13, 2021: Banks accuse customers of using expired travel tickets and fake passports to obtain foreign currency.

August 25: Forex fraud persists as CBN orders banks to publish names, BVN of defaulters. The EFCC is getting involved.

READ: Does Nigeria Really Need CBN’s e-Naira?

August 30: Naira reverts to N520 for a dollar in parallel market as businessmen and importers
claim that despite their willingness to buy at any cost, “there just isn’t enough money”.

September 7: CBN says she is not concerned with the valuation of the naira, but only with increasing the supply of dollars in the currency market. The naira hit a record high of 532 per dollar.

September 10: Latest news! Naira is trading at N545 – the lowest level in its 48-year history.

The problems

Although the central bank paints this picture, the onus of “boosting supply in the economy” does not fall on them alone. It is a combination of monetary and government policies. The aspect of monetary policy is within their purview because Apex Bank coordinates the activities of the central bank which aim to influence the amount of money and credit in an economy.

But government policy refers to government decisions that affect the economy. The Central Bank is not responsible for policies that would attract investment into the country, ease of doing business, diversification of income, provision of infrastructure that would aid local production and curb excessive imports, and importation. relentless supply of petroleum products in the country.

Dependence on oil revenues continued to prove unreliable. No less than two-thirds of Nigeria’s crude destined for October exports has yet to find buyers. India and Europe no longer buy as before. The Indian Oil Corporation, our biggest buyer in Asia, buys tiny drops of our oil.

Contextually, they are currently buying 1 to 2 million barrels per week, which is relatively lower than the 20 million barrels per month they were buying before the pandemic. In addition, Nigeria’s crude oil production plunged to an all-time high of 1.24 million barrels per day last month due to continued disruptions at the key export terminal of Forcados. Nigeria’s supply forecast appears to remain below OPEC’s quota as operational setbacks continue. The country therefore currently has a supply and demand problem.

Another enemy of the naira is importation. Africa’s largest oil producer in Q2 2021 imported lube oil, diesel and gasoline at 68 billion, 152 billion, 782 billion naira respectively. The money paid for these products is in dollars and the insufficiency of our refineries forces us to import more.

The Central Bank also asked manufacturers to source raw materials locally and gave the same advice to traders that local production is the way to go. The central bank’s overall adherence to the duties of the federal government will only continue.

A key factor in the death of the naira is the shortage of major players in the forex space. There is the conviction that the CBN should reintroduce Bureau De Change operators. A foreign exchange market with regulated and informed BDC operators will kill speculative activity in the shadow market.

To corroborate this position, we will examine the article by Friedman of Milton “The Case for Flexible Exchange Rate”.

Milton Friedman presents a more positive view of speculators and argues that speculative noise traders will be sidelined by savvy speculators. Friedman asserts that “speculation will only be destabilizing if speculators are uninformed, trade noise with a tendency to buy when prices are high and sell when prices are low.” For Friedman, savvy speculators can help stabilize markets.

Intuitively, this suggests that the market needs informed speculators. In the case of Nigeria, Bureau de Change operators can play this role and their reintroduction would reinforce the market sentiment meaning “offer” rather than “tightening” that the country is currently experiencing.

A glimmer of hope ?

Meanwhile, Nigerian Finance Minister Zainab Ahmed told reporters Nigeria would raise around $ 3 billion by selling Eurobonds in the second week of October.

The government approved the raising of 6.1 billion dollars from abroad, “So we plan to do half of this on the Eurobond market and the other half from bilateral and multilateral sources”, said the minister.

This coincides with the report that the CBN is considering increasing the dollar’s liquidity in the short term. The $ 3.35 billion SDRs received from the International Monetary Fund helped build reserves and will help stabilize the currency with this sale of Eurobonds. Until then, we hope the naira appreciates and eventually converges with the CBN rate.

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