In a week that reminded currency traders of Nazi Germany’s Blitzkrieg air attacks during World War II and the destruction of swathes of Europe, the CBN virtually ‘bombed’ currency speculators last week as the bank introduced rapid fire tactics to pull up the value of the of the naira when most analysts had expected the local currency to take a further dip from N525/$ to N575/$ by March 2017. The first act of the central bank to ease pressure on the naira was to give commercial bank customers access to the official currency window to buy foreign exchange to pay for their wards school fees abroad and to cover medical expenses.
This first move wrong-footed several speculators and led to many of them losing millions of naira as the local currency regained value against the United States dollar. Matters were made even worse for traders who had tried to ‘short’ or sell the currency at higher rates when the CBN sold a hefty USD $500million dollars at the interbank market in an effort to improve foreign currency liquidity. At this time speculators who had turned the naira into a one way selling bet were reeling under the weight of huge losses which got worse when the regulator added a further USD$100million to the market, choking off a sizeable chunk of the previous speculative bubble. As if this were not bad enough, the CBN on Friday last week announced that it would sell a further USD$350million this week in advance warning to currency hoarders’ still living a delusion of a possible short-term resurgence of the dollar against the naira.
Recent week developments have sent Nigerians into an ecstatic joy. But the CBN’s currency intervention welcome as it seems at first blush may fail to address the fundamental problem of managing a sustainable foreign exchange regime. The multiple layers of exchange rates for different market segments and industries, though well intentioned, have resulted in one of the most confusing arrays of exchange rates ever witnessed in the market since 1988, when the Ibrahim Babangida administration struggled, but failed to create a single tier market. The CBN efforts have led to abuse by financial and nonfinancial intermediaries who have taken advantage of the differential and discriminatory pricing of foreign exchange among market participants to arbitrage between alternative rates as they go on to make mind-boggling personal and corporate gains. A new class of billions has suddenly emerged by dint of privileged access to foreign currency. This has meant rent-seeking intermediation that has been a bane of the economy has gotten worse, as arbitrageurs adept at playing between market segments take easy cash off trading tables. For as long as CBN resists floating the naira even if within a so-called ‘dirty’ band (that still involves a modicum of official intervention), so long will the naira be consistently put under pressure to bow to the dictates of demand exceeding supply.
The CBN’S counter speculative intervention within the previous week was undoubtedly brave and brilliant as it gave speculators a taste of bile to tame their rampant greed, but it still did not address the longer term issue of currency stability. If the CBN is to really deal with the inconvenient issue of errant currency traders, it must be prepared to dismantle the rickety multi-tier currency market contraption it has built and give greater leeway to a more market-oriented approach to foreign exchange management. Admittedly political expediency quite often than not lashes out against economic good sense, but with the economy squeezed between very difficult fiscal and monetary options, it would appear safer to err on the side of market rationality than social populism.
Nevertheless, the CBN’s frontal onslaught on currency speculation is commendable; it has sent a strong message to market manipulators that the currency trading floor could punish with as much severity as it occasionally rewards handsomely for errant behavior. However, beyond its recent short-term foreign currency management measures the monetary policy regulator has also systematically engaged in the growth of the real sector of the economy through the unconventional but effective funding of a plethora of concessionary retail credit schemes designed to offer specific industries affordable loans to expand domestic output and employment. Such measures ultimately should result in the reduction of foreign imports and the rise in non-oil exports, developments that are becoming increasingly attractive. With such unfolding real sector realities, pressure on the local currency should begin to weaken over the next few months as demand for foreign currency drops off and a growing club of enterprises tussle for the emergent export opportunities looming in the horizon. As Emefiele takes on the currency mafia, the twin policies of shocking them into submission and propping up the economy’s real sector should gradually turn the wheels of wealth in the right direction as the naira regains its strength.