Dollar rain, naira drought: Naira’s treacherous flight path

The exchange rate of the naira took a treacherous flight path 12 days ago that sent excruciating pains down the spines of Nigeria’s fraudulent bureau de change (BDC) operators. Economy watchers and government thief catchers chuckled in utter disbelief.

The naira, the currency of Africa’s largest economy, started the week on a historic miserable exchange rate of N910 to the dollar.

As stakeholders awaited the bad news that the naira had plunged to N1, 000 to the dollar, Nigeria’s battered currency executed a strange mode swing and recorded unprecedented gains against the U.S. dollar. The treacherous BDC operators were thrown off balance.

By Friday, November 11, 2022 the naira appreciated to a record N680 to the dollar. BDC operators who were buying the dollar at an exchange rate of N800 and selling at N910, watched helplessly as their coveted dollar took a pounding from the naira.

The operators suddenly halted the buying of dollars and opened the way for a dollar rain which the dwindling stock of naira in the foreign exchange market could no longer mop up. The dollar suddenly became an unwanted currency. Market watchers contend that BDC operators lost anything from N10 billion to the dollar rain and naira drought.

Two major reasons have been advanced for the unprecedented gains recorded by the naira during the week. The first is what is still being described as rumours from the government of the United States of America (USA). There are claims that from 2023, the U.S. government would no longer allow the use of dollar notes circulating in Africa in particular.

The rumour is said to have stampeded BDC operators into unleashing into the market, millions of dollars hoarded to manipulate the exchange rate of the naira for the attainment of the dubious gains that has persistently engendered the precipitous depreciation of the naira to the benefit of the treacherous BDC operators.

For the first time in decades, there were more dollars in the parallel market than naira. There were so much dollars in circulation that the dwindling stock of naira in the market could not mop it up. For the first time in decades, Nigeria’s foreign exchange market was a buyer’s market. The sellers could no longer call the shots.

The next reason for the spontaneous bumper harvest of the naira was precisely the cause of the naira drought in the foreign exchange market.

Over the years, the Central Bank of Nigeria (CBN) had tried its hands on several monetary policy instruments to curtail the excess liquidity that precipitated the naira’s shameful depreciation. None worked.

After the last meeting of the monetary policy committee of the CBN, the apex bank hiked its monetary policy rate (MPR), the rate at which it lends to commercial banks, to 15.5 per cent and wrenched the cash reserve ratio (CRR) to 32 per cent in a desperate bid to curtail the excess liquidity behind the endless depreciation of the naira.

The naira defied monetary policy manipulation and plunged below N800 to the dollar before the CBN wielded the most lethal weapon in its monetary policy arsenal.

At last it was the decision to redesign the naira that engineered a catastrophic naira drought in the market that sent the dollar tumbling precipitously.

The two developments conspired to engineer the miraculous appreciation of the naira. While the rumoured discarding of old notes by the U.S. government compelled BDC operators to unleash millions of hoarded dollars into the market, the CBN naira redesign plan dried up the naira in the market thus drastically reducing demand for dollars as treasury looters were scared from unleashing their loots on the market.

It was an odd combination of excess supply and catastrophic demand drought that tumbled the value of the dollar and got the naira appreciating momentarily for the first time in decades.

The Economic and Financial Crimes Commission (EFCC) pulled the strings that crashed the dollar. The thief catchers laid siege to the BDCs and arrested operators who sold forex to clients with suspicious sources of naira.

Many believe that the decision of CBN to redesign the naira and EFCC’s siege on the BDCs have nothing to do with the tremendous appreciation of the naira. They contend that the excess supply of dollars triggered by the rumoured discarding of old notes by the U.S. government was solely responsible for the naira gains.

That conclusion is both mischievous and catastrophically misleading. It is designed to rob EFCC of the deserved credit for the spontaneous sanitization of Nigeria’s beleaguered forex market. It is also designed to rob the CBN of the credit for eventually deploying the right policy instrument to tame the naira rain that mopped up whatever volume of dollars was deployed in the market.

The truth is that treasury looters have hoarded enough naira to mop up whatever volume of hard currencies supplied in the market. If the rumoured discarding of old dollar notes by the U.S. government had hit the market at a time when the thief catchers in EFCC were not there to stop the use of looted funds in the market, treasury looters would have mopped up everything unleashed on the market by the forex hoarding BDC operators.

The CBN monetary policy coup mandating naira redesign has thrown up an eternal truth that has all along been contested in Nigeria. That truth is that the parallel market exchange rate of the naira is not a true reflection of the purchasing power of the naira. The development proves that the parallel market exchange rate of the naira is determined by the quantity of dollars the treacherous BDC operators are willing to supply the market at any given time.

That cruel manipulation had all along been mistaken for the invisible hand of the market forces of demand and supply on the price mechanism of the naira. In Nigeria, that invisible hand is treacherously manipulated at the supply end to tip the balance against demand. It is not an impartial arbiter.