CBN and exchange rate
Last week Tuesday, the Central Bank of Nigeria signalled its intention to continue with policies that have narrowed the spread between the interbank and black market Naira-dollar rates as it kept its benchmark monetary policy rate (MPR) on hold and warned off currency speculators. The last three weeks have been unprecedented in the battle to narrow the gap between the official and black market rates as the naira recovered from a low of N520 to the dollar at the end of February to trade at about N375 to the dollar as at Friday last week.
Perhaps the fall of the naira to N520 against the dollar finally forced the hand of the CBN to forcefully intervene in the forex market after it seemed to have stopped dollar sales in favour of forex accretion. In the last three weeks alone, the CBN has pumped about $2.4 billion into the forex market to defend the beleaguered naira.
With an external reserves war-chest of over $30 billion, the CBN felt confident and ready to punish speculatorsin the black market who have been betting on a continuous drop in the value of the naira. Hitherto, the naira has received significant beating in the black market with some analysts even predicting that it will further fall to N1000 to the dollar by the end of the year. True, the CBN had always insisted that the black market rate was not a true reflection of the value of the naira and was a product of wild speculation.
No doubt the CBN’s bullish attitude is fuelled by the surge in oil prices from January after the Organisation of Petroleum Exploration Countries (OPEC) agreed in November to cut crude oil supply. This immediately resulted in a spike in crude oil prices, with Brent crude, touching a new high of US$58 per barrel, almost 100 percent higher than the price in January 2016. The rise in crude oil prices was good news for Nigeria, which had been exempted from complying with the OPEC restrictions, and which also depends on crude oil sales for more than 90 percent of export earnings. This, with the reduction in vandalisation and militant activities in the Niger Delta, increased production and consequently, foreign exchange receipts for Nigeria.
However, indications in the market are not favourable to a continued high oil price. There are already doubts that OPEC and non-OPEC members are or will continue to adhere to the oil cut agreement. More distressing is the revival and boost of Shale oil production in the United States, whose total production stands at about 9.1 million barrels per day. Consequently, oil prices is beginning to go down, averaging $49.71 in the last week.
We are sceptical that CBN intervention alone will not be sufficient to eliminate the divergent rate between the official and black market. All that is needed for speculators to begin to bet against the naira is a sustained decline in oil prices. If oil prices continue to fall, the CBN may find it difficult to sustain its interventions.
We urge the CBN to immediately remove the restrictions around pricing and allow for a more flexibly determined interbank rate that could incentivise autonomous inflows and reduce the pressure on its reserves. It is not a huge surprise that despite the gains in the naira and CBN intervention, there has not been a corresponding autonomous inflow from other (autonomous) sources to ease the pressure on the CBN. That may be a sign to the CBN that only a liberalised market will restore confidence in Nigeria’s forex market. It is better it seizes this opportunity now to do the right thing rather than being forced into another round of reactionary actions at a later date to defend the naira.