Dollar supply remains thin, and that’s piling pressure on
the naira, which extended its slump in the black market on Thursday to a new
low of 940 per dollar, according to multiple traders who spoke with
BusinessDay.
The gap between the official rate and the parallel market
rate, which had narrowed in the early days after the naira was floated, has
opened up again. With the official rate closing at N781 per dollar on Thursday,
the gap is now at N159 per dollar.
Banks don’t have enough dollars to go around and buyers are
increasingly turning to the black market, widening the gap between the official
exchange rate and the price on the street.
“Liberalising the FX market is a great idea but it has to be
followed with consistent monetary and fiscal reforms that would deliver the
benefits of a liberalised market,” said Abiola Rasaq, an economist and former
head of investor relations at United Bank for Africa.
“Otherwise the system would take the pains of liberalisation
in vain and that is definitely not the good intent of the current government in
liberalising the system,” Rasaq said.
The Central Bank of Nigeria (CBN) has been criticised for
going to sleep after taking the critical first step towards fixing its broken
FX market after it allowed demand and supply to determine the exchange rate
again after years of pegging the rate.
The move was however never intended to be the sole solution
to Nigeria’s acute dollar shortages, but the critical steps the market expected
will follow the shift in policy have not happened.
Importers of a list of blacklisted 43 items continue to be
shut out of the official market, forcing demand to the black market, while the
apex bank has failed to come clean on the actual level of dollar reserves it
holds with independent estimates suggesting it is half of the amount publicly
declared.
“It is important that there continues to be price discovery
on the official market,” Razia Khan, managing director and chief economist,
Africa & Middle East at Standard Chartered Bank, said.
“Equally important is that no autonomous USD supply should
be discouraged from the official market,” Khan said.
The lack of transparency around the allocation of foreign
exchange has also not helped the naira, according to Ari Aisen, the
International Monetary Fund’s mission chief for Nigeria.
“Access to foreign exchange must be transparent with the
right macroeconomic policies in place, to reduce volatility,” Aisen said.
He stressed the need to mop up excess naira liquidity to
stabilise the currency.
It would however appear the CBN is doing exactly the
opposite of mopping up excess naira liquidity, according to Mark Essien, a
Nigerian entrepreneur and startup investor.
“Nigeria’s money supply (M3) went from N5.5 trillion to N6.4
trillion between May and June,” Essien said. “The naira is devaluing because
the amount of naira entering the economy keeps increasing. The CBN is pumping
money in for no reason I can figure out.”
Foreign investors who spoke to BusinessDay said they were
watching to see if the CBN would wilt in its push for a flexible exchange rate
and revert to the old practice of pegging the rates amid the naira free fall.
The investors are curious to see if the Economist
Intelligence Unit (EIU) was right afterall in its prediction that the CBN will
go back to a system where they have more control over the exchange rate to try
and stop the naira from losing its value much further.
EIU had said in its latest report that a return to the fixed
or regulated control exchange rate system was likely because of the CBN’s
inexperience in tackling the difficult challenges of obtaining a fair value of
the naira without hurting the economy.
“The CBN lacks experience in conducting monetary policy
under a float, and the need to control rapidly increasing inflation will become
more acute over time,” the EIU analysts said.
Nigerians are taking a beating from several angles, whether
from the tripling of petrol prices or the sharp fall of the naira, and are
mounting pressure on President Bola Tinubu, who is perhaps as unpopular as his
reforms.
Tinubu secured the mandate to lead Nigeria with the lowest
number of votes at the February poll, and his appointment of a record number of
ministers has left a sour taste in the mouth of many Nigerians who say the
government is not sharing in the pain of the reforms being pushed through by
Tinubu.
The CBN has however been advised to continue on the path of
a flexible exchange rate but is now being urged to follow its actions in June
with more that will engender investor confidence.
“The CBN must stay the course now more than ever,” a senior
business leader said. “Going back now could prove even more damaging as we seek
to rebuild investor confidence after many years of doing the wrong things.” -