Naira: A currency under pressure

Of late, the nation’s currency, the Naira, has come under global focus. Though, there have been severa l concerns over the state of the currency and the way it was being managed by the Central Bank of Nigeria (CBN), the whole brouhaha came to the fore on February 14, when the International Monetary Fund (IMF) suggested devaluation of the naira. The multilateral agency had advised the apex bank to allow for more exchange-rate flexibility and this was roundly rebuffed by the CBN. Ever since then, the Naira has faced dilemma with the industry regulators and pundits seeking ways out of the melee.

Essentially, the currency of any nation serves three basic functions which include as a medium of exchange, a standard of value and a store of value. It remains its official legal tender. Put more succinctly, it is a national pride. As the Naira is to Nigeria, that is how the Dollar and Yen are to the United States and Japan, respectively. Same applies to other countries of the world.

In the case of Nigeria, the CBN is the sole issuer of legal tender money throughout the Federation. It controls the volume of money supply in the economy in order to ensure monetary and price stability. The Currency and Branch Operations Department of the CBN is in charge of currency management, through the procurement, distribution and supply, processing, reissue and disposal and disintegration of bank notes and coins.

Naira at the interbank market
The naira eased to its weakest level against the U.S dollar for eighteen and a half months on Tuesday last week at the interbank market segment of foreign exchange market. Experts attributed the development to political uncertainty ahead of April elections necessitating panic buying.

The Naira closed at N156.30 to the dollar, around the same level it traded on August 20, 2009, compared to N155.10 on Monday. The CBN supplied $400 million at its bi-weekly auction on Monday against demand of $435 million. As a check, CBN requested banks to submit lists of customers buying dollars in order to verify the sources and stem the potential risk of capital flight.

Market watchers admitted that in the past couple of days, a number of companies were seen bringing forward their obligations because of fear that the Naira could depreciate further resulting in panic buying of the dollars.

They opined that strong demand by companies with unconfirmed letters of credit, payment on foreign credit cards and large foreign exchange purchases by Bureaux de Change (BDC) operators are putting pressure on available dollar at the interbank.

Analysts say the Naira could depreciate rapidly ahead of the April presidential elections triggering an increase in price levels for an import-dependent economy which is battling to keep inflation down to single-digit.

In the past, political uncertainty had led to currency depreciation around election time in Nigeria.

However, on the last day of trading, the naira bounced from its weakest level in eighteen and half months buoyed by expectations that a government agency was about to make a large dollar sale.
The Naira strengthened to N155.80 against the dollar on the interbank market from N156.95 last Thursday, its weakest since late 2009.

Dealers explained that some banks were selling off their long dollar positions after speculation of planned dollar sales by the Niger Delta Development Commission (NDDC) hit the market and provided liquidity support for the naira.

The shallowness of the Naira market means a single large transaction can have a significant impact on the exchange rate.

Market watchers have predicted that the Naira will further appreciate in the coming weeks with the anticipated month-end dollar sale by major energy companies and the forex auction on Monday where the apex bank is expected to continue to sell more dollars.

Pressure on Naira
There is no doubt that the Naira is under intense pressure. However, the apex bank looks set to win a showdown with the foreign exchange market as it resists pressure for major depreciation of the Naira ahead of national elections.

Apart from election spending, fiscal policy is another concern for investors. The Senate on Wednesday passed a N4.972 trillion 2011 budget, increasing spending plans from President Jonathan’s initial proposal three months ago. Over half of the planned spending is recurrent, meaning the country is spending more on keeping government running than on badly needed new infrastructure and development projects.

Some clever maneouvering by the CBN in the market, and a recent improvement in the foreign exchange reserves, now suggest it will probably succeed in keeping the Naira in a corridor of plus or minus 3 percent around N150 to the dollar, as it has been doing for over a year.

Recently there has been good news on the foreign reserves; they rebounded to $36.4 billion on March 8, up 10 percent from the end of February, though they remained well down from $42 billion a year ago, according to the CBN.

The government has attributed reserves’ decline in the past year to counter-cyclical spending during an economic downturn, the defence of the Naira, seed capital for a planned sovereign wealth fund, and financing for infrastructure projects.

Those explanations do not fully satisfy everyone, but authorities insist that with oil output and prices rising, reserves will build up once again.

And the CBN has taken some clever administrative steps to reduce pressure on the naira. It has asked banks buying foreign exchange at its auctions to submit lists of customers for which the purchases are occurring, to be sure the demand is for commerce rather than for speculation.

It also plans to start selling short-tenored forex forward contracts from next Wednesday as part of efforts to smoothen demand and help businesses hedge their currency risk. This could reduce the threat of panicky sales of naira.

CBN and stability of Naira
There is consensus that the major reason behind the Naira dilemma is election spending. The election is only some weeks away, so the politicians are deploying resources for logistics to win votes and get elected into various positions.

In recognition of this, the apex bank had embarked on various measures to check the ripple effects

Only recently, the CBN Governor assured that the apex bank would meet the rising need from investors for foreign currency before elections next month as it tries to stabilize the naira and control inflation..

His defence is that the jump in demand this month is temporary, based on investors’ fears that violence between religious and ethnic groups may disrupt elections.

IMF and Sanusi on Naira
The IMF said last month that speculation against the Naira could become intense if the reserve depletion continued. It made a case for a devaluation.

In his response, Sanusi said the IMF advice does not make sense, stressing that if the IMF is concerned about inflation, and therefore ask a country that is import dependent to devalue its currency, such is not based on sound economic logic.

According to the CBN Governor,” So long as we’re comfortable with the coverage given by the reserve position of the country we will pursue a stable exchange rate policy. If we see an elevation in demand, that in our judgment is temporary, we will meet that demand. Nothing has changed fundamentally as far as the economy is concerned. But people want to see a smooth transition, a free and fair election before they bring back the money.”

Sanusi has been defending the Naira, keeping it within a range of between 3 percent above or below N150 per dollar, in a bid to strengthen the currency and curb inflation which has made to the bank to deplete its foreign currency reserves.

There are mixed reactions on the part of experts on whether to devalue the Naira or not.

Experts’ opinions
Razia Khan, economist for Africa at Standard Chartered Bank, said the current Naira corridor might conceivably be shifted, but only carefully and gradually.

“We all believe that the mid-point is around N150 but there is nothing to stop the central bank adjusting it up gradually in response to high demand and then maybe allowing it to go down again when conditions allow. Do we think that they are about to announce a big devaluation in the naira? No. But do we think the recently announced budget plans are going to create more pressure on the currency? Yes.”

Source : Tribune