• Party primaries set new exchange rate ceilings
• BDC operators run out of supply as politicians warehouse dollar
• Fear of higher political risk spreads across markets
• CBN’s rigidity stalling capital inflow, says Yusuf
The currency market may have defied experts’ prediction that the informal segment would witness a momentary glut of dollars as political party delegates, who reportedly made a killing with hard currencies, would start offloading their foreign exchange holding after the crucial political events.
Afriupdate gathered that two days after the ruling All Progressives Congress (APC) held its presidential primary, illiquidity has worsened in the black market with major Bureau de Change (BDC) operators unable to meet the growing demand.
With politicians taking more than necessary from the market, there are concerns that the crowding out effect would hurt the economy severely in months to come and worsen the political risk.
Findings suggest that some currency traders cannot single-handedly raise as little as $1,000 as they have run out of liquidity following the massive mop up during the presidential nomination exercises.
The protracted currency crisis has taken a dramatic turn in the last three weeks, with reports that delegates of the two major political parties were mobilised majorly in hard currencies.
Reports of ‘dollar rain’ began to be widespread a week ago after the opposition Peoples Democratic Party (PDP) conducted its presidential primary in the Federal Capital Territory (FCT).
Checks in the market showed that illiquidity has worsened in the past week with the naira selling between N600 and N610 to a dollar. The dollar peaked during PDP’s convention, trading for as much as N610/$ but retraced to about N602/$ last week.
As at yesterday, the value of local currency slumped to N607/$ as uncertainties continue.
The Guardian learnt that major dealers are still hoarding their assets, believing that the naira is yet to bottom out.
A dealer in Lagos said most of his colleagues ran out of supply in the last few weeks. Asked what could have been responsible, he said the greenback was mopped up for use by politicians and after the conclusion of party primaries, the money is yet to get to the retail end of the market.
“You know the way things are done. Some of the delegates would still sit on the dollars, expecting the rate to go up. The few who need money have sold back to the dealers who were contracted to mop up the market in the first place, and the dealers are sitting on the cash. Supply is at a very low state now,” he said.
Further investigation suggested that major dealers are holding on to their holdings for possible bargain hunting in the coming days. Speculative activities are in full gear with major traders expecting the dollar to inch close to N700/$, thus creating a wider profit margin.
Thus, private enterprises, which need FX for businesses are starving as there is no supply anywhere. A textile trader in Lagos told our correspondent she put an “urgent business on hold since last week and had to cancel my trip because I cannot get dollar anywhere.
“When I mentioned to the ‘aboki’ that has been supplying me dollars for over seven years that I needed $25,000, he just told me to forget it, that he can’t raise it even if he combs the whole of Lagos,” she said.
Former director-general of the Lagos Chamber of Commerce (LCCI) and pro-market crusader, Dr. Muda Yusuf, warned that private sector operators would be worse off in the coming days as they cannot match the “war chest” of politicians who are now major competitors in the currency market. He added that the trend portends danger for the economy.
Yusuf, who spoke on a television programme, expressed concern about the widening gap between the official and parallel market rate, saying it is a major disincentive to foreign capital flow.
Last quarter, the country attracted a total of $1.57 billion. On year-on-year (YoY) analysis, the figure slumped by 17.46 per cent while the quarter-on-quarter (QoQ) performance was even worse at 28.09 per cent.
A businessman and presidential candidate in the 2019 general elections, Dr. Tope Fasua, put the culture of dollarisation of the political space and general dollarisation of the society in the same basket.
He said: “It is a pointer to one very important issue in our time. Politicians and our leaders are the ones who have no confidence in our currency. They say to destroy a country, the first thing you have to do is to destroy its currency.
“So, we have actively destroyed our currency, and leaders after leaders have shown that they have no interest in the currency and the country. Every governor, council chairman, councilor, including their children, only spend dollars,” Fasua, who is also an economist, said.
He noted that the continuous demand for dollar is a major cause of naira depreciation, alleging that the elite are not interested in building a stronger naira.
Ken Ife, a professor of economics, said those who are hoarding hard currencies, including the delegates, would start offloading once it is obvious the exchange rate is not going beyond N610/$.
“It is psychological. They want a better bargain, which is the reason they are hoarding FX. At best they will observe for one to two weeks, once it is obvious the exchange rate has hit the roof, they will start selling off what they have,” the economist said.
Ife said the current panic is unnecessary as dollarisation of the political process is good for the informal segment. He agreed that the process is putting “so much pressure on the demand” but noted that it is a circle that accommodates both demand and supply.
Besides, he argued that the informal sector constitutes only seven per cent of the FX market, while the official supply still holds 93 per cent. He, thus, wondered why the entire country would be extremely anxious when manufacturers and others who need FX for genuine businesses have an option of the official window.
Sources in the financial system said much of the hard currencies being distributed by politicians were not sourced locally. “A large chunk of it is from overseas. A lot of banks are party to the transfer of the money, much of which is under-the-table deals.
“When people talk about mopping of the market, they are talking about a very small portion of the amount being spent. A portion of it comes from overseas while another part was pulled out of storage tanks and all manner of places,” the source informed.
Financial experts had previously observed that the post-election FX market would be determined by the interplay between demand and supply. They added that shock or surplus would depend on which of the two variables takes the upper hand.
Adeola Adenikinju, a professor at the University of Ibadan and member of the Monetary Policy Committee (MPC) had told The Guardian earlier in the year that Nigerians should expect capital importation for electioneering purposes.
In the meantime, demand takes the upper hand worsening the historical volatility of the market and stretching the capacity the economy to a limit. Prices, which are often based on black market rates are being reviewed across the board, with dire consequences for inflation. For the first time, the arbitrage between the official and black market rate is almost N200 per dollar, which analysts have decried as a blight on the economy. Dollar trades around N415 band at the investors’ and exporters’ (I & E) window.
The Central Bank of Nigeria (CBN) regularly intervenes in the official rate, hence the pricing is almost static and a far cry from the real rate of exchange.
Experts said the window could also achieve a dynamic equilibrium if the apex bank liberalises it and hands off its intervention.
The monetary authority had pledged to pursue convergence of the different exchange rates around I&E window. About two years after the apex bank made the promise, it has merely replaced the then grossly discounted CBN official rate with I & E, while other rates still exist.
The CBN Governor, Godwin Emefiele, had faulted calls for clean floating of the exchange rate, saying the rate will spiral out of control. He said that Nigeria’s manufacturing sector was not mature for such experimentation.
But the controversy over exchange rate harmonisation will certainly continue. For instance, Nigeria’s frontline human rights activist and lawyer, Femi Falana, recently wrote to the apex bank requesting information on abolition of multiple exchange rates.
The letter dated May 24 and obtained by The Guardian read: “While speaking at a virtual Investors Conference with the Federal Government of Nigeria organised by CitiBank on June 23, 2020, Mr. Emefiele disclosed that the various exchange rates would be unified around the I & E Window (NAFEX) exchange rate.
“Furthermore, he dismissed activities in the parallel market as an illegal business, adding that people patronising the market are doing dealings that are not recognised by authorities. The Minister of Finance and National Planning, Zainab Ahmed, confirmed the CBN plan to unify the exchange rates in the country.
“Given the foregoing, we hereby request you to furnish us with information on the date fixed by the CBN Board to end multiple exchange rates regime and unify the rates in the country.
“As this request is made under the Freedom of Information Act 2011, you are required to furnish me with the requested information not later than seven days upon the receipt of this letter.” Checks, yesterday, revealed that the demand is yet to be met after expiration of the ultimatum.
MEANWHILE, the CBN may be under intense pressure to protect the naira against the dollar, as the foreign reserves continue to nosedive. May 2022 witnessed one of the steepest falls in the reserves in recent months. The reserves stood at $39.58 billion at the close of April but dropped to $38.48 billion. Effectively, Nigeria lost about $1.1 billion of its reserves in a single month.
Bismarck Rewane, an economist, had earlier in the year warned that the reserves might tumble to $32 billion later in the year amid continued pressure on the domestic currency.
This may not be unconnected to the dollarisation of the political process, which continues till after the general elections in February next year. There are also fears that each time the official exchange rate is devalued, which could happen if the pressure continues, the parallel market rates will adjust upward automatically.
The CBN injected $3.36 billion into the FX market in two months as part of efforts to ensure the stability of the naira, it was gathered. Figures obtained from CBN’s January monthly report on ‘Foreign Exchange Market Developments’ showed that $1.71 billion and $1.65 billion were injected in December 2021 and January 2022 respectively.
Victor Ogiemwonyi, a retired banker, drew a link between electioneering and naira devaluation, saying “it is a pity that the naira is always pushed into devaluation during our elections.
“The 2015 elections were the beginning of the current devaluation crisis we are in now. Politicians do what they do and the anti-corruption agencies look the other way, with no one held accountable. So, it continues.
“The pressure on the naira will continue for now, because of the high political uncertainties. The large influx of dollar cash into the open market will give respite to the black market but for only a while. The consistent drop in our reserves says a lot.”
There are also concerns in the market that the 2023 elections could set a new FX price ceiling that market forces may not be able to recover from even after the election. The only time in recent memory the naira witnessed a major appreciation on the black market was in 2017 when it appreciated from about N500/$ to N360/$. Otherwise, it has been a one-directional movement.
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