By Chinwendu Obienyi

In recent weeks, the naira has performed well in the money market, sustaining its ascent and shattering erroneous beliefs that the currency was doomed and rapidly sinking to the level of Venezuelan bolivar, a flunking currency on the global arena.

Goldman Sach Group captured it thus; “Nigeria’s naira stands poised to continue its upward trajectory, building upon its status as the best-performing currency globally this month.

“This probably can run further as we would see an extension of the move to N1,000 and maybe even sub-N1,000. Six weeks have gone by and it has continued to hold the line, so that is very encouraging”.

As the naira held onto its bullish momentum despite the dollar’s most recent aggressive gains last week, the move has been described as soothing.

To be more specific, the naira appreciated significantly against the US dollar throughout March 2024, marking a major turnaround for Nigeria’s exchange rate policy.

Official figures indicate that the naira closed the month at N1309/$1 on the last trading day, up from N1595.11/$1 at the end of February 2024. This represented about 21.8 per cent gain and analysts were quick to point this turnaround to the success of several forex policies, strategies and interventions by the Central Bank of Nigeria (CBN) all aimed at stabilizing and strengthening the national currency.

In the parallel market, the naira saw an even more pronounced recovery. The exchange rate improved from N1,600/$1 in February to N1,250/$1 in March, representing a 28 per cent gain in one month highlighting the effectiveness of the measures taken to bridge the gap between the official and unofficial currency markets.

The gains recorded in the official and parallel market was the largest seen in over five years as before the gains, the exchange rate was fixed at about N450/$1 for almost two years and around N380/$1 between 2020 and early 2021.

It is not even yet the end of April 2024, the naira has so far rallied 12 per cent against the dollar, adding to its 21.8 per cent gain in March, which has led to Goldman economists, who had predicted in February that the naira would strengthen to N1,200/$1 during 2024, now forecasting that the nation’s currency could potentially advancing beyond that level after a raft of measures by the CBN.

Cardoso and CBN circulars

The CBN Governor, Olayemi Cardoso, who took office in September 2023, has been aggressive in lifting Nigeria’s borrowing costs to attract foreign cash and clearing a domestic backlog of dollar orders.

The reformatory policy circulars are legion. The recent ones like the capping of banks’ Net Open Position (NOP) at 20.0 per cent short and 0.0 per cent long, the resumption of OMO sales at higher rates, the streamlining of the number of BDCs (through higher minimum capital base), the signaling effect of improved policy communication and clearing of over $5 billion verifiable FX backlogs as well as the resumption of FX sales to authorized dealers are part of the magic wand that supported  naira’s recovery.

According to Cardoso, the apex bank is doing everything it can to fix the nation’s FX crisis and is bent on stabilizing the Nigerian Foreign Exchange Market. It also looks like the CBN could continue to roll out a raft of more circulars. The CBN, in its letter to DMBs last week titled; “The use of foreign currency (FCY) denominated collaterals for Naira loans” announced the prohibition of the use of FCY as collaterals for Naira loans except where the FCY collateral is FGN issued Eurobonds or guarantees of foreign banks (including standby letter of credit).

For subsisting facilities in this category, the apex bank granted a 90-day window to the DMBs to wind down their exposure or face punitive measures – a 150.0 per cent risk-weighted Capital Adequacy Ratio (CAR) computation on the facility (this would significantly draw down on the available liquidity at the disposal of the affected bank, thereby resulting into asset-to- liability mismatch and earnings loss). Also, it is important to note that the CBN has raised interest rates twice, first by 400 basis points and then 200 basis points.

However, the apex bank faces pushback from businesses, with the Manufacturing Association of Nigeria (MAN) complaining in a statement that rate hikes “reduces access to funds, manufacturing investments and competitiveness.”

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Goldman Sach Inc Economists was also reserving judgment on whether the central bank will hold the line, though they noted that further rate hikes may not be necessary if inflation stabilizes and starts moderating.

Experts react

Reacting to the development, economic experts speaking to Daily Sun, commended the CBN for rolling out measures in stabilizing the naira.

They, however, stated that there is a need for a more nuanced approach to address the challenges posed by high-interest rates and tight liquidity conditions adding that balancing the objectives of price stability, financial stability, and economic growth will be crucial in navigating the complex economic landscape.

The Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, said that the CBN’s efforts to sanitize the foreign exchange market by curbing speculative activities, hoarding, and malpractices have contributed to increased transparency and efficiency in the forex market.

Yusuf added that the use of various monetary policy instruments like the Monetary Policy Rate (MPR) and Cash Reserve Ratio (CRR) has helped in managing liquidity and ensuring financial stability. According to him, these policy measures have led to some positive outcomes, such as improved forex market stability, reduced exchange rate volatility, and increased investor confidence.

Corroborating Goldman Sachs projection, he stated that due to the increased level of confidence which has played a vital role in stabilizing the currency and removing pressure on the FX market, the forecast is achievable.

His words, “The second major point is the fact that we are likely to see a reduction in the pressure for the importation of petroleum products due to what is happening with Dangote and possibly the Port-Harcourt refineries. If you look at the basket of imports, importation of petroleum products accounts for about 30 per cent of our imports and you can imagine that kind of pressure. In fact there are some estimates that put the annual bill between 10 to $15 billion of our imports of petroleum products. So if we are able to take that out, that will ease the pressure and also help to strengthen the currency.

The only concern I have is in the liquidity management component of it. Because we also need to be careful not to ascribe this entire outcome to the liquidity management because, of course, the CBN governor also acknowledges it and the trade-offs we are beginning to see, especially with regard to interest rates. Interest rates have gotten to the level that it is almost impossible for any real sector operator to utilize bank facility and those that already logged in those facilities, they are groaning as we speak because we are talking about interest rates of between 35 per cent-40 per cent, depending on what level, which is extremely challenging”.

He further added, “We also need to make haste slowly because we need to come to a level that it can be surely sustainable because this injection that we are seeing is a portfolio component and portfolio funds are not that dependable. They can fly out at any time. So we should not be racing too fast to the bottom because we need to ensure enough stability. The CBN should begin to figure out at what level we can actually stabilize and sustain this race because there is a need to also build our reserves. Our reserves are not in a very fantastic position. We can build our reserves so that we can stabilize the currency at a particular level. So we should not be in too much of a hurry to race to the bottom. Hence, I think what Goldman Sachs is projecting is something that is achievable”.

Co-Managing Partner and Managing Director, Comercio Partners Capital, Steve Osho, said that the coordinated efforts between the fiscal authority (government) and the monetary policy authority (CBN) have been evident in addressing economic challenges.

Osho noted that high-interest rates on government papers, such as treasury bills and bonds, increase the government’s borrowing costs and added that this can put pressure on public finances and limit the fiscal space for other critical expenditure.

He added that high-interest rates can deter both domestic and foreign investments whilst mentioning that there is a risk that FPIs might pull out their investments once they perceive that they have made sufficient returns which can lead to capital outflows and put pressure on the currency and reserves.

“There is a level as to how we can keep this high interest rate. We are buying government papers at 27 per cent for a year, we are doing 10 year, 20 year apart at around 21 per cent and so there is a level at which we can keep these things. The FPI has come in around N1,600 and now we are trading at N1,101, there will be a point where they will look at it and tell themselves that they have made enough money and then decide to pull out their investments. But if we are building reserves using those particular funds, then there is a challenge but if we are able to build our reserves on FDIs and other measures from mining, exports from oil which has unfortunately dropped, if they can increase that, then we will have more accretion to reserves and not just dependent on FPI coming into the system”, Osho explained.

For their part, analysts at Afrinvest said, “But beyond the short-term gains that the coordinated policy rollout of the CBN would deliver, we maintain that concerted fiscal and monetary policy actions that would enhance cheap and sustainable FX inflow channels – crude oil production, remittances, foreign direct investments (FDIs) and non-oil exports – as well as exploring new frontiers such as the talent asset industry (notably arts, entertainment, and sports) would be critical to Nigeria’s quest of turning the corner on a sustainable basis”.