Corruption, Oil and the Naira – A Timeline of Tough Times and Tough Measures by JJ Omojuwa

I enjoyed knocking the Central Bank Governor, Godwin Emefiele. It was quite easy, the naira was suffering too much in the hands of the U.S. dollars and all the analysis by the trusted and cosmetic experts made it clear his ideas were mostly responsible. Apart from the reality of oil price and Nigeria’s dwindling production numbers. Doubted by friends, pressured by colleagues and superiors, taunted by currency speculators and heavily criticised by hordes of local and international economic and finance analysts for strongly maintaining his stance on the management and direction of Nigeria’s foreign exchange rate market, Mr. Emefiele is definitely having the last laugh, at least for now!

In what is without a shadow of doubt the most dramatic foreign exchange movement in Nigeria’s economic history, the Naira over the last five weeks recovered swiftly against the Dollar to trade at N372 to $1 at the parallel market, from a record high N520/$1. It was a feat that took even the most ardent supporters of the embattled CBN Governor by surprise.

The official exchange rate was not spared in the revival of the Naira, moving marginally from N350/$1 to N305/$1 within the same period. The movement is so fast I am certain the numbers would have changed by the time you read this. Most Nigerians who have had to endure the economic hardship consequent upon a biting recession, rising inflation and skyrocketing exchange rate, understandably rejoiced at the reprieve brought about the Central Banks’ forex injections. Currency speculators on the other hand watched in dismay as the market adjusted the value of their jealously guarded forex piles to within true value range.

Questions of sustainability have been asked by economic analysts, considering the flurry of forex injections by the CBN in the weeks accompanying the recovery of the Naira. The bellying assumption here is that the CBN’s forex injection is the unitary factor responsible for the upward Naira movement. This is a faulty, even myopic, assessment of CBN’s overall interventions in the foreign exchange market.

An inquisition in how the Naira fell so flat over the last 24 months perhaps gives a more appreciable insight into the sustainability and free float campaigns and the need for more holistic debates around the CBN’s role as umpire, rather than overseer, of the nation’s foreign exchange market.

After a period of economic boom inspired by record high oil prices and increased production – a period also characterized by unparalleled corruption and mismanagement – the Nigerian economy began to experience significant stress in 2014 as the impact of a global economic downturn touched down. The resultant effect if these shocks exposed age-long policy imbalances that characterised the economy and adversely impacted the foreign exchange market.

As the nation’s dollar revenue waned and economic fundamentals debilitated, immense foreign exchange market pressures developed with enormous ramifications for the exchange rate and official reserves. Thus, the naira depreciated by 35 percent against the US dollar in 2016. Today, the official value of the Naira is N305 to a dollar at the interbank market whereas rates between N400/US$ to N550/US$ was recorded at sub-official markets prior to the recent resurge.

Such spread between the interbank and the sub-official rates made the question of the equilibrium value of the Naira has become ubiquitous. A combination of unabated demand for forex, corruption as evident in round-tripping and manipulation of the exchange rate by speculators was met with lower crude oil earnings and trapped forex stolen under the last administration.

The argument for finding the equilibrium value of the Naira through an hydra-headed approach of short term stemming of demands, recovery of trapped forex, and priority allocation of available forex to critical sectors before a full float as proposed by the CBN fell on deaf ears. Given the timeline of events that led to the stabilization of the foreign exchange market in recent weeks, Emefiele appears to be vindicated.

In addition to the foundational restructuring of the foreign exchange market to shut out rent seekers and manipulators, and given the increased clamour for better access by small end-users of the forex, the Emefiele-led CBN took actions on diaspora remittances with full recognition to the fact that these can provide crucial liquidity and ease the latent instability in the forex market.

The licensing of a number of International Money Transfer Organizations (IMTOs) in order to encourage, facilitate and monitor the inflow of diaspora remittances to the country has proven to be a crucial move by the CBN. In addition to this is the sale of foreign currency proceeds of IMTOs to BDCs so as to increase the participation of other critical stakeholders in the foreign exchange market without funding the BDCs from the external reserves, to ensure a robust reserve. Again, on sustainability, only about 80 percent of CBN’s $2 billion intervention has been utilized, showing demand has been stemmed (e.g rice importation) and illegal demands have been weeded out.

Also, the CBN now debit banks in naira immediately after every FX auction, so they have to sell to their customers almost immediately as against hoarding to force upward price movement at the expense of the naira.

These policy measures have in no small part helped address rates instability while taking pressure off the external reserves. The long term effects of the elimination of rent seekers and manipulators will become even more apparent and make the need for forex injections by the CBN less frequent. Four weeks is a long time anywhere in the world but in the world of the Naira versus the U.S. Dollar, it is a much longer time. One Mathieu Ogbeh tweeted on Monday, ‘whatever they are smoking at the CBN, they should keep smoking please…’ I’d translate that to mean that the CBN should not let down its guard. There are doubters who insist these gains will be reversed in a matter of weeks, the job of the CBN is to win over the rational ones.

It is always fun to knock public office holders when they get things wrong, but ultimately, the joy of most of us is to see things go the right way. The recent surge in the price of oil is certainly another factor in the naira’s recent recovery, so the CBN must be prepared for the shocks of another price reduction, especially in a situation where OPEC decides to end the production cuts. Like Nigeria, the global economy has made volatility the norm in recent months. There is really nothing to celebrate yet – even with the extraordinary gains of the naira in recent months – but having knocked this government and especially the CBN Governor, Godwin Emefiele, when the Naira kept taking punches and knocks from the Dollar without throwing a single punch, one must humbly cautiously raise one’s thumb at this time. That way, no one should doubt that ultimately, this is not about one man or woman, it is about the numbers. Men lie, women lie, the exchange rate does not!

© JJ. Omojuwa