The recent Naira gains
On February 20th following the deliberations with bank CEOs at the Bankers’ Committee meeting in Lagos, the Central Bank of Nigeria released yet another revised set of guidelines to guide the accessing of Forex for Personal Travel Allowance and School Fees. This action was necessitated after the naira broke the psychological 500 mark against the dollar in the wake of fresh demand pressure in the unofficial market. One of the main reasons attributed to this further naira weakness was the increased demand for FX for payment of school fees overseas as January/February is usually the period when demand soars ahead of commencement of new academic session in spring.
Under the guidelines, about $371 million was sold to the banks. The CBN also called for banks to immediately commence opening of fresh Letters of Credits for equivalent amounts won at the bid. This is a statement of intent. “Bring it on! We have the capacity to meet your demand!” the CBN seems to infer with that pronouncement. The Bank will sell an average of $1 – $3 million each to 21 banks weekly on a wholesale basis for onward sale to customers for the purpose of PTA, school fees payment and medical bills payment abroad.
Consequently the beleaguered Naira has been on a winning streak since then. The naira’s black-market rate rose 13 percent to 460 per dollar from an all-time low of 520. It appreciated another 2.2 percent to 450 on Monday thus narrowing the gap with the official market rate, which has been arbitrarily set at 305 since September last year.
It appears the breaking of the N500/$ psychological barrier pushed the CNB into this aggressive action. But the action is still a blessing for forex starved Nigerians and businesses. It is expected that with such sustained action, the Naira will begin to appreciate, trade and commerce and commerce within the economy will enjoy a boost, cost of doing import-related businesses will reduce, personal savings will grow, inflation will begin to correct albeit thinly, and ultimately, the economy will gradually grind back to life.
However, Nigerians must not be deceived. All these are mere cosmetic actions and will not permanently arrest the sliding naira. The gains is contingent on the CBN continuing to sell down Nigeria’s reserves – and without increasing forex inflow, we do not see that happening. A more permanent solution, as we have been emphasising over time, is the complete liberalisation of the forex market. Without this action, it will be difficult to lure back foreign investors who have deserted the country in droves after capital controls were introduced earlier on in the life of this administration.
Admittedly, the government is working hard to ensure dollar availability by trying to solve the problems in the Niger Delta and bring back daily crude oil production back to near optimal levels of 2.5 million barrels per day. But even this cannot help the naira much until the government takes the difficult decision to remove capital control and floats the naira. We have the government will be bold enough to do what is necessary and what it must do to attract back foreign investors and in the process ease the pressure permanently on the naira.