Fall of the naira

Godwin Emefiele probably belongs to the school of conservative monetary economists who believe that investors’ confidence in a currency heads down the precipice the moment the governor of the central bank openly announces that he would defend the currency at whatever cost.
The governor of the Central Bank of Nigeria (CBN) has deployed all the weapons in the apex bank anti-depreciation arsenal in defence of the naira. The only thing left is a public expression of the mantra of distressed central bankers and finance ministers: “we will defend our currency at all cost.”
The CBN is at its wits end in the campaign against the fall of the naira.  The generals in the CBN anti-depreciation war room have run out of ideas on how to halt the naira’s journey down the precipice. The fight has been narrowed down to demand-side approach.
The situation is so bad that anyone who needs as little as $5, 000 to pay school fees or settle medical bills abroad, first has to apply to a bank, and the bank would in turn apply to the apex bank stating precisely what is to be done with the forex, before the approval is considered.  Some months ago, one could stroll into a banking hall and buy up to $5,000 without a plethora of paper works. Cash crunch has ended that.
The CBN tactics is counter-productive. It has driven demand under-ground. Those desperate to get forex but could not obtain it from the official source are now flocking to the parallel market. And the parallel market is gasping for funds.
Last week the naira crossed the N180 to the dollar threshold in the parallel market. There are fears that it could hit N200 if supply is not beefed up.
The problem of the naira is more of perception-induced stampede than cash crunch. Nigeria is not broke. The economy is still expected to grow at an enviable rate of 6 per cent. The foreign reserves are not attractive, but could sustain seven months imports.
Oil revenue has dropped by 23 per cent due to tumbling prices in the global market, but a prudent government could manage what is left by reducing its weird profligacy and encouraging internally generated revenue through intensive tax drive.
But the rulers of Nigeria are not known for prudence. The cost of governance gulps down almost 80 per cent of the N4.6 trillion in the 2015 budget proposal. The message from the uninhibited cost of governance in the 2015 budget proposal is that no one in Aso Rock is willing to make sacrifices that would reduce spending in a year of dwindling forex income. The perception of investors judging from the track record of government is that the future of the naira is bleak. No one wants to believe that the CBN can defend the naira.
The worries over the perceived bleak future of the naira are so palpable in the money market that banks are very reluctant to grant foreign currency-denominated loans. Risk managers in the nation’s banking system believe that the stage is set for a replay of the calamitous loans default of 2008 when petroleum products marketers who obtained loans at N116 to the dollar defaulted because they had to pay back at N150 to the dollar.
The stampede in the capital market is instigated by investors’ fears that an odd combination of tumbling oil prices and government profligacy would bring the naira to its knees.
Investors are selling their shares and flooding the foreign exchange market with demands for dollars which they are in a hurry to repatriate.
By last week the yield curve of the NSE which measures returns on investment in the Nigerian capital market had plunged into the red by 17 per cent, year-on-year. Market watchers had expected the Nigerian capital market to close the year with average returns on investment hovering around 15 per cent. The NSE is now a buyers’ market. Just about everyone entering it wants to sell and get out before the naira plunges deeper. And there are very few buyers.
The next problem of the naira is the activities of speculators. While foreign portfolio investors are selling their shares and converting the proceeds to dollars to flee the economy before the naira plunges deeper, speculators are buying up dollars and waiting to sell when the naira tumbles precipitously.
The speculators strategy is to buy up dollars, drive down the exchange rate of the naira and sell at a huge margin. Last week the margin between the official and parallel market rates was more than N20.
The CBN can frustrate speculators by plugging demand-side leakages and beefing up supply. That would require an excellent combination of the current access restriction with more liberal funding of the market.  The CBN is low on forex, but it can afford to spend more on legitimate and essential items. Right now, it is only restricting access to forex for some legitimate transactions, while speculators have a field day.
Sanitisation of demand and a measure of supply-side approach would stabilize the naira and stampede speculators into releasing their stock of forex into the market to avoid huge losses.