No respite yet for troubled Naira

The desperation of the Central Bank of Nigeria (CBN) to defend the naira at all costs comes with

heavy burden on the economy and bank customers. Despite spending over $33.5 billion in seven years to stabilise the local currency, restricting debit card use overseas and planning to stop weekly dollar allocations to Bureaux de Change (BDCs), the CBN is yet to stop naira’s woes. COLLINS NWEZE examines naira’s slide and those benefiting from the trend.

Aminu Abudulkadir, a currency speculator, was preparing for the Suri (2’oclock) prayer when he got a text message that made him richer. His business partner, Abubakar Idirs, had on December 18, informed him that the naira was exchanging for N280 against the dollar in the parallel market.

Abudulkadir hurriedly said his prayer, moved to the vault where he kept $50,000 to confirm it was intact.  He then called five of his most trusted aides and gave them $10,000 each to exchange to naira. “I made N82 extra on every dollar sold because I bought at N198 to a dollar,” he said, adding that the transactions concluded within three hours fetched him N4.1 million profit.

The naira has been exchanging at N199 to a dollar in the official market, but in the parallel market, the local currency is facing the highest level of volatility in its over 50 years’ history.

It was not only devalued by 35 per cent in the last 14 years, but in 2001 alone, its value was slashed 27 per cent, followed by an eight per cent cut last November. The local currency first hit double digits in 1991, moving from N9.9 to N17.2 to a dollar the following year. That constituted a significant 73.7 per cent change. Thereafter, a continuous slide ensued, attaining triple digits in 2000. Although it was considerably stable between 2000 and 2003 (below N120 to a dollar), the recent adverse global capital flows and drop in oil price, among other factors, have culminated in the current all-time low.

An economist, Bismark Rewane, explains why the naira is on the downside. “As oil prices dipped, the Central Bank of Nigeria (CBN) has prioritised stability of exchange rate in the official market. It has drawn an exclusion list of avoidable imports from being funded in the official market. With the foreign exchange demand for the items transferred to the parallel market, rates in that market have soared”.

Besides, other factors like terms of trade, inflation differential, public debt, current-account deficits, interest rates, political stability and the overall economic health determine the exchange rate of a currency.

The fall in crude oil prices has reduced Nigeria’s dollar earnings, making it difficult for the apex bank to fund imports. Record oil prices had helped Nigeria to build the largest currency reserves in sub-Saharan Africa. The price peaked at $63 billion in September 2008. But, after attaining a record-high of $147 in July of that year, Nigeria’s crude oil prices – bonny light, have plummeted.

As at December 29, oil was trading below $38 per barrel and the foreign reserves level has declined to $29.48 billion, $33.5 billion lower than the September 2008 figure.

A large chunk of the reserves went to Bureaux De Change (BDCs) operators as weekly allocations to help close the rising gap between the official and parallel market rates. The BDCs got between $75, 000 and $30, 000 weekly from the CBN. There are, however, a grand plan to stop funding the BDCs in the New Year.

Today, oil sits at $37 a barrel. Goldman Sachs recently agreed it could tumble as low as $20 a barrel, a level that would decimate the already heavily damaged economies of Nigeria, Saudi Arabia and Russia. The Organisation of Petroleum Exporting Countries (OPEC) predicts the price won’t go back above $100 until 2040.

These weak economic indicators and forecasts have continued to put the local currency under severe pressure from internal and external factors but the CBN is not giving up, except that its measures seem overboard, with varied implications for bank customers and the economy.

Battling to save the naira

The CBN had imposed some currency control measures to save the naira. In June, it curbed access to the interbank currency market for importers bringing in a variety of goods. In an effort to conserve its dollar reserves, the bank said importers could no longer get hard currency to buy 41 items, ranging from toothpicks and rice to steel products and private jets.

One of such measures – total ban on the use of debit cards abroad – has caused panic in both local and international markets with customers feeling the pangs of the policy, which was meant to conserve foreign reserves and protect the local currency.

Michael Osinachi was in Dubai shopping when he got news of CBN’s ban on the use of debit cards abroad on Twitter. She quickly called her account officer in GTBank to confirm the authenticity of the information, and his fears were confirmed.

It was after her debit card was rejected at the point of paying for the goods in shopping mall that the intensity of the policy dawned on her. Left with only $500 cash, she boarded the next flight to Lagos to save herself from embarrassment.

“Nigerians always go on holidays to Dubai, Las Vegas, shop in London, and take their kids to Disney World in Florida now and again. Over the years, we have come to rely on our debit cards anytime we are outside the country. But, that opportunity is now gone,” she lamented.

Thousands of bank customers share Osinachi’s experience outside the country. Also affected were web-based businesses that require to regularly pay for server space and web hosting in Europe or America using their debit cards.

The Chief Executive Officer (CEO) of  InvestAdvocate, Peter Obiora, said the policy shift has made it difficult for him to pay for server space for his online web business. He said unlike previously when he could use his debit card to pay for such transactions to be approved,  now, the card must be linked to a dollar-denominated domiciliary account that must be funded locally.

Former executive director, Keystone Bank, Richard Obire, said that just like a coin, the debit card restriction has two sides because Nigeria is integrated into the global economy, and her citizens should get intangible services that promote businesses. The use of naira-denominated debit cards abroad, he said, is one of such benefits.

He said that instead of making a blanket restriction on card use abroad, the CBN and other commercial banks should look at the countries where the biggest volume of forex is spent, and what it is being used for. Obire said Nigeria still gets over $20.8 billion annually from Diaspora remittances, and other forex inflows from other sources.

For instance, the World Bank Migration and Remittances Factbook 2016 showed that Nigerians living abroad sent home $20.8 billion in 2015. The figure, it said, is by far the largest volume of remittances to any country in Africa and the sixth largest in the world.

“The United States is the biggest remittance sending nation to Nigeria, followed by the United Kingdom. Nigerians received $5.7 billion in remittances sent from friends and family members in the US and $3.7 billion from the UK in 2015 and the rest across the world. Nigeria is also the third largest destination country for migrants from other African nations,” Obire said, adding that the card ban could hurt and halt such remittances.

The former bank chief said the restriction could also stall CBN’s plan to promote Small and Medium Enterprises (SMEs) and the over N220 billion allocated to the sector.

He said: “We have been talking about promoting SMEs, but this policy will reverse all the gains made over the years. Recall that the SMEs always have to pay for one service or training or the other from abroad, and this will the limit the extent of such exposures,” he said.

Obire lamented that when he tried to renew a website fee with an international company, although his bank, First City Monument Bank (FCMB), grudgingly approved the transaction, but it collected twice the amount paid previously.

“In the past, the fee was N15,000 but the last time I did it, the bank collected N38,000 after dollar conversion. How many SMEs can withstand such hike in the name of remitting funds to foreign partners,” he said.

The former bank chief said that before the card restriction, SMEs operators can easily use their cards and make simple transfers to foreign partners. He said that while the CBN and banks have the right to protect the foreign reserves and the naira, they must also consider the interest of customers and their businesses.

Standard Chartered Bank had in an e-mail message to customers, stressed that their naira debit cards will no longer be used for international transactions.  It attributed the decision to limited forex supply in the market. It said the action, remains a temporary measure that will be reversed when the forex supply improves.

Equally, Diamond Bank e-mailed its customers, urging them to spend from their domiciliary accounts. The bank also promised its customers unlimited all-year-round spending from their dollar and pounds sterling accounts across all channels like web, Point of Sale (POS) terminals and Automated Teller Machines (ATMs) among others.

The CBN position

The CBN says forex scarcity forced commercial banks’ to place a restriction on the use of ATM cards abroad by their customers. The apex bank which admits it has no powers to reverse the banks’ decision on the use of the ATMs abroad, has thrown its weight behind the commercial bank’s position. According to it, it would assist in reducing the pressure on the naira.

CBN’s Director, Monetary Policy Department, Moses Tule, explained that the restriction might continue until the country’s forex earnings improved. He hinted that if banks had not taken the decision to restrict the use of ATM cards abroad, some of them would have been experiencing challenges meeting the demand of their overseas’ customers.

Such occurrence, he said, would have caused huge liabilities in the balance sheet of the banks, thus affecting their operations.

Tule said much as the CBN sympathised with Nigerians for inconveniences they experience in carrying out transactions abroad, there was little the bank could do to reverse the decision of the banks.

 “The limitation on the use of debit or credit cards outside the country was not a limitation that was placed by the CBN. They were restrictions that banks placed because they have to settle whatever transactions you make with your debit cards with their corresponding banks in foreign currency. And if the banks do not have the foreign currency to do that, then you create a liability problem for them,” Tule explained.

The priority of the CBN, he said, would be to use the forex to settle matured Letters of Credit for the importation of petroleum products and other raw materials.

Stakeholders speak

The Managing Director, Afrinvest West Africa Plc, Ike Chioke, believes the incorporation of a long-term diversified strategy in fiscal policy is required to cushion shocks in various segments of the economy.

For him, the persistent pressure on the naira could have been minimised if a counter fiscal policy had been developed, as the CBN cannot continue to defend the naira with foreign reserves.

“To reduce this pressure, an inward looking policy (tax incentives, infrastructure development and production subsidy) should be emphasised to reduce the dependence on imported goods”, he said.

He explained that asides from oil receipts, the development of the Agricultural sector will in the short term reduce the forex burden of food imports and on the long run, enhance foreign receipts if its comparative advantage in the sector is efficiently deployed.

But, an executive of the Nigerian Export-Import Bank, Chinedu Moghalu, said the sharp rises in the dollar exchange rate have been in the parallel market as the volatility has not been allowed to extend to the official market where the most economically important transactions are funded. “Although the dollar exchanged for N280 at the BDC in the week before Christmas, and even retreated immediately, by the way – at the official market, the dollar has continued to exchange at N199 to dollar since March,” he said.

For him, the CBN has taken a position – backed by the administration of President Muhammadu Buhari – which is to protect the official market from speculation and damaging devaluation.

 “But the reality is that, as a people, we have to make adjustment in our tastes. Not only should we be ready to replace foreign products with local substitutes; we must be prepared to let go of some exotic products, even where there is no direct alternative. It is part of the demand of building a virile country and a sustainable economy,” he said.

Consumers, exporters react

With 9.4 per cent inflation rate in November, the fate of the naira is already impacting on the cost of goods and services. Investigations showed that the prices of some food items like chilli pepper, tomato and onion has soared by over 100 per cent in Lagos markets in ahead of the  the Christmas celebration, same period the naira exchanged at N280 to a dollar. An independent survey on cost of farm produce showed that a basket of chilli pepper is now N25, 000 against N12, 000 it sold a month ago.

A big basket of tomato, which previously ranged between N8, 000 and N11, 000, now sells for between N13, 000 and N17, 000. A medium-size basket of fresh pepper now sells for N12, 000, from N8, 000. A jute bag of onions cost N35, 000 from its initial price of N25, 000.

However, for exporters, naira’s slide against the dollar means increased cash flow and higher profit margins.

The Managing Director, Sunyprofit International Limited, Sunday Anjorin, who exports Nigeria timer to China and Vietnam, captured the excitement that came with the decision. “The fall in naira value is creating more millionaire-exporters than ever before. We now have more naira after exchanging our dollar inflows,” he said.

Anjorin said although exporters’ cash flow will rise, “the celebration may be cut short given that their cost of production will equally increase, because the cost of raw materials will become exorbitant, making nonsense of the higher profit margins.” Still, he said timber operators would take advantage of the naira slide and increase their profit margins.

Also to benefit are multinational oil companies and their expatriate workers, whose salaries are in dollars. People who receive forex through Western Union and MoneyGram are also to benefiting from the naira woes.

CBN measures take tolls

But the National Bureau of Statistics (NBS) says Nigeria exports plunged in the third quarter from a year ago and imports also fell, as currency controls introduced by the CBN start to bite.

The balance of trade in the third quarter was N645 billion, down from N2.87 trillion in the third quarter a year ago. Exports fell by 50.3 per cent in the third quarter from a year ago and imports declined 7.3 per cent, the NBS said. The fall in crude oil exports, which accounted for 69.1 per cent of total domestic exports this year, hit the economy the most.

“The sharp decline in exports and slight decrease in imports contributed to a continued fall in the country’s trade balance, by 32 per cent,” the NBS said.

Global payment

companies groan

Global payment companies like Visa, MasterCard, InterSwitch (owners of Verve cards), are also losing businesses because of the policy shift. The companies, he said, have made massive investments in Nigeria and always get fees, when the cards are used abroad.

The General Manager, IBM Africa, Taiwo Otiti, said Visa International and other global payment firms, have made huge investments in Nigeria, including increase in sophistication of technology deployed in the country. He said: “The standard for Visa in Nigeria is the strictest in the whole payment system worldwide. The Visa stipulated a very, very high standard for Nigeria and this costs a lot of money,” he said.

Visa Country Manager in West Africa, Ade Ashaye, said the firm invests heavily in advanced fraud, fighting technologies and continues to develop and deploy new and innovative programmes to mitigate fraud and protect cardholders in Nigeria.

He said the global payment firm’s efforts have helped in scaling down fraud rates, enabling account holders to use Visa with confidence across the world. “In fact, with technological innovations and advances in risk management, global fraud rates have declined by more than two-thirds in the past two decades. VisaNet has an enhanced ability to identify fraud on individual accounts and coordinated attacks on multiple accounts across the system, enabling issuers to stop potential fraud at checkout, before it occurs,” he said. Also, Visa and MasterCard are already working on introducing “digital tokens” instead of account numbers for processing purchases made online and with mobile devices in Nigeria. Tokens provide an additional layer of security and eliminate the need for merchants, digital wallet operators or others to store account numbers.

Interswitch, owners of Verve card, explained that as a second layer of defence, it haD also introduced Scorebridge, a fraud management system that enables Electronic Financial Transaction (EFT) messages to be processed through predefined Artificial Intelligence. This helps in determining the transaction’s risk and probability of a fraud.

These investments, analysts said, were targeted at getting increased use of card transactions, locally and internationally.  Obire insist the ban on card use abroad, is, therefore, a disincentive for further research and investment by the global technology firms in the economy.

Why crisis persists

 Rewane believes that besides the dwindling crude oil prices and reduced forex earnings, the decision by the CBN to peg the naira in the official market, resist further devaluation, lower interest rates and increase credit to the real sector, has heightened the exchange rate crisis.

Although pundits’ debate whether the naira is overvalued or undervalued, the real issue is that the CBN’s control of the local currency prevents it from being responsive to economic fundamentals.

“While every economy is controlled in some way, the CBN’s refusal to allow the exchange rate and other relative prices adjust to terms of trade shocks, seems to be disrupting the country’s fundamental economic structure,” Rewane said.

To him, the sharp decline in oil prices has created trade shocks experienced by many oil producing countries and this has led to the readjustment of most emerging market currencies. “The naira is overvalued at its current official exchange rate of N199 by about 12 per cent. The CBN insists on pegging the naira at this rate despite slowing economic growth, reduced forex earnings, dwindling oil prices, depleting external reserves and increasing inflationary pressures,” he said.

But, this is not the first time Nigeria has suffered from an overly controlled currency. From 1981 to 1985, during a similar period of control and oil shocks, relative prices did not adjust to restore internal and external balances. This led to low production, economic distortions, massive retrenchment and poverty.

In contrast, from 1986 to 1991, when the Structural adjustment Programme (SAP) was introduced, the exchange rate was flexible. Economic data showed that there was increased output, better employment figures and less poverty. Both periods had negative oil price shocks.

Other economists insist that Nigeria’s current managed floating exchange rate regime combines features of both the fixed and flexible exchange rate. They explain that a lightly managed floating exchange rate regime is advocated given that the exchange rate becomes determined essentially by demand and supply forces, while allowing the CBN to intervene occasionally to moderate excessive fluctuations, which are prone in developing countries, including Nigeria.

Analysts insist that with the exchange rate at the parallel market depreciating to as low as N280 to a dollar, it may be time for the CBN to take another look at its stance on the exchange rate management.

Pundits forecast that should oil prices fall below $30 per barrel, an exchange rate adjustment would be inevitable and given the current macroeconomic headwinds, a lightly managed floating exchange rate policy may be more suitable for the naira to regain its lost glory.

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