Monday, April 18, 2016

Nigeria: Grappling with pros and cons of forex management

Nigerian foreign exchange market has in recent times been at its lowest ebb and it appears, there is no solution in sight. The naira has lost over 100 per cent of its value on the streets, even as the gulf between the official exchange rate and the parallel market has continued to widen beyond normality. The Central Bank of Nigeria, CBN, sells dollars to banks at an average rate of N197 while at the interbank market; the value of the naira has continued to hover around N199. However on the streets, where the bureau de change operators alongside the street hawkers otherwise known as black marketers sell foreign exchange, the exchange rate has moved from around 220 last year to around N305 to the dollar. So far, the value of the naira has depreciated by 17.2 per cent at the CBN window from N165 to the dollar, which it was at the end of December 2014 to the current rate of N197. The depreciation was huge at the parallel market as the value of the naira dipped by 66.6 per cent within the period of one year and one month.

The pressure on the foreign exchange market is not being helped by the declining value of Nigeria's major source of foreign exchange, oil at the international market. The price of crude had dropped from just below $50 per barrel at the beginning of 2015 to about $33 per barrel last week. This had impacted heavily on Nigeria's revenue and foreign exchange reserve which has so far declined by 18.6 per cent to $28.06 billion from $34.46 billion, which it was at the beginning of last year. To the Managing Director and Chief Executive of Sterling Bank, Mr. Yemi Adeola, the options for managing foreign exchange at a critical time such as the one Nigeria has found herself in is two prong-capital control as well as allowing currency to float. He explained that to adopt capital control as a strategy, one focuses on key sectors, "in other words, you determine where you want the foreign exchange to go to, you want to curb the wastage of the foreign exchange, you 24 don't want a situa tion, where people will use the foreign exchange for speculative proposes, you want to control it and that is what is happening now. "But it is a double edged sword, when you adopt capital control, investors are reluctant to come in because if they bring their money in at 200, they are not sure if by the time they are going out they will be able to get money to buy and at what rate. So you shut your door to new money coming in which is not a desirable option. It is a supply issue and it is a function of your productive capacity and ability as a country.

"The other thing you can do is to let the Naira find its true value. But what is the true value, the easiest answer is to use the value on the street but that is not necessarily the true value and some say it is the CBN rate which is not also always the true value. The true value is in between the parallel market and CBN rate, but there are ways we can find the true value of the naira and devalue to that extent. If people are sure that they are getting true value for their dollars, then the dollars will come in." The CBN chosen the path of capital control as it had embarked on measures to reduce the rate of foreign exchange outflow from the reserves. It had exempted 41 items from the list of eligible for foreign exchange, and closed the Retail Dutch Auction System, RDAS, and established an order based system. It had also reduced daily and annual limits on naira cards outside the shores of the country from $150,000 to $50,000 annually and $300 daily and backed the move by banks to stop accepting foreign currency deposits as well as the recent ban on the usage of naira denominated cards abroad. Asides this, it likewise reduced its weekly foreign exchange sales to BDCs from $30,000 to $10,000 and had eventually stopped the sales out rightly early this year while putting off calls for the devaluation of the naira. An import dependent economy, Nigeria imports majority of its consumer goods and many manufacturing companies also have a portion of their raw materials that are imported while most machinery are imported. A devaluation of the naira which would have bettered the fortune of an exporting economy will cause a spike in the cost of production and the prices of goods and services and ultimately a rising inflation in an import dependent nation like Nigeria. Already, prices of imported goods have begun to rise.

For instance, sachet tomatoes paste which used to cost around N30 per sachet now sells for N50, and this goes for other import based products. Indirectly, this has led to a rising inflation as the Consumer Price Index for December last year rose sharply from 9.4 per cent in November to 9.6 per cent. Inflation is expected to hit double digit this year. The current situations in the Nigerian foreign exchange market has also not favoured many companies in the country as manufacturing companies and well as assembling plants that import their raw materials are having a hard time sourcing foreign exchange. Particularly, companies whose raw materials or equipments have been categorized under the not eligible for foreign exchange items. The owner of a health equipment company and laboratory in Lagos explained that he has been facing a hard time paying his suppliers abroad. He explained that since he could no longer access foreign exchange from banks and cash deposit of foreign exchange ha d been discontinued, he had resorted to paying for his goods using the cards of his staff until their annual limits are exceeded. While this might have been achievable for a small business, large companies have been in a fix as they ran out of raw materials and reduced production leading to reduced income, lesser capacity to pay staff and higher possibility of running out of business. One of those affected is Dag Motorcycles Industries Nigeria Limited, the assemblers of Bajaj tricycles and motorcycles which had terminated its contract with Ashton consulting which supplies its labour.

The company according to its Secretary/ Legal Services, Ademuyiwa Abe, had been forced to cut down its 1,000 per day production capacity by 40 percent, thereby putting some of its labour force out of work. Noting that the forecast for the Nigerian economy for 2016 is not looking too good for the company, he said "we were forced to cut back on some of our operations. In the last few months of last year, there was restriction on foreign exchange by the Central Bank of Nigeria, CBN, so most of the time, there was no foreign exchange to bring in the completely knocked down parts, CKD, not just the CKD, but other items required for assembling. "Since there was no more foreign exchange, the situation became so bad that we had no choice, but to terminate the services of our contractor, who supplies the workers that do the assembling," he said. With the dollar being priced at around N305 at the parallel market, Abe said considering the current situation, "the finish product will n o longer be affordable and if it is unaffordable, the market segment is out of reach because there will be no demand and the purchasing power will definitely be affected." The CBN however seems adamant on its stance as there was no decision taken on the prevailing circumstances in the foreign exchange market at its first Monetary Policy committee meeting of the year, which held late last month. The inaction of the apex bank towards the foreign exchange challenge of the country analysts say will further increase uncertainties, pressures on the naira and further reduce the waning global confidence in the Nigerian economy. Analysts at WSTC as well as Financial Derivatives Company Limited noted that the refusal of the apex bank to address the challenge of the current disequilibrium in the foreign exchange market will further put more pressure on the naira. Stating that the current restrictive measures adopted by the CBN will not be sustainable in the mid-term, analysts at WSTC said th ey expect the downward pressure on the Naira in the interbank forex market to persist, reflecting the realities in the macro economy. "We do not expect the Naira to continue to trade at the same peg that was set almost a year ago (in February 2015) after which crude oil, the major source of forex supply, has declined in value by about 50 per cent.

"Moreover, the nation has arguably become less attractive to foreign capital inflows during this period as a result of policy uncertainty, and more recently lower returns on Nigerian risk-free assets. "Also, it is important to note that the current exchange rate amplifies the adverse fiscal implications of low price of crude oil, which is currently trading around a 20 per cent discount to the benchmark price of $38 set in the 2016 Appropriation Bill. This will, all other things being equal, widen the estimated budget deficit beyond the N2.2 trillion provided for in the Bill or ultimately affect the implementation of the budget," the analysts at WSTC explained. To FDC analysts, the inaction of the CBN will increase uncertainty in the economy and heighten exchange rate pressures. "The decision to maintain status quo does not do much to support the stock market as sell pressures caused by speculation on possible naira devaluation are expected to persist. In addition, the deci sion is unlikely to incentivize international investors, many of whom have remained on the sidelines. "There will be further uncertainty in the economy unless the CBN implements measures to stem pressures at the forex market. There is not a more critical time for the CBN to implement a flexible exchange rate policy than now. This will bridge the gap between the official rate and parallel market rate which is currently at N105, the FDC analysts said. In spite of these, the government and organized private sector believes that keeping a tight grip on the foreign exchange would prompt the country to look inwards and learn to produce what it needs.

View Point[1]

Do You Get A Bad Response From Your Wife After Making Love, Click Here To Cure Premature Ejaculation Using This Natural Solution[2]
How I Increased my Manhood Size & Stopped Premature Ejaculation That Scattered My Relationship..Click HERE For Details.


Source → Nigeria: Grappling with pros and cons of forex management

Nigeria: Grappling with pros and cons of forex management Rating: 4.5 Posted by: Unknown

0 comments:

Post a Comment

Blog Archive