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The Nigerian Naira has been a major headache for its citizens, investors and businesses owners as the currency fell short of the largest economies in Africa. In 2016 alone, the currency was ranked among the worst performing currencies in the world, but this was thanks to the federal government and the monetary authority’s slow approaches in attending to market play.
How It All Started – Flexible Forex Policy
Almost a year after President Muhammadu Buhari took over the government in 2015, the monetary authority hearkens to the cries of investors, analysts, economists, and countrymen by allowing the Naira to float freely at the official market rate on June 15, 2016.
After policy, the currency moved swiftly from 199 at the official rate and 215 at the parallel markets to 300 and over 400 to a dollar at the official and market segments respectively.
Shortly after the sharp fall against the three major currencies – Euro, Pound and Dollar, the Central Bank of Nigeria, headed by Godwin Emefiele, used governmental instruments on the currency at the official market by pegging it at 305 to the dollar. This is despite granting a concession to some businesses, coupled with President Muhammadu Buhari-led federal government's body language, that shocked investors to stay afar as uncertainties mounted over government's 'cosmetic flexible rate policy'.
With the policy and tools employed by the Central Bank of Nigeria, the Naira doubled it exchange rate system to official rate, parallel market, manufacturers rate, Pilgrims, school fees and medical exchange rates.
CBN's Instruments and Clampdown On BDCs
When the spike on Naira at the parallel market became unbearable for regulators, the monetary authority made use of state apparatus to clamp down on the black marketers. This action forced them into hiding and caused more injury to the currency, as shortage of supply extends across the board in a period when families are planning summer break, payment of foreign school fees, most especially the Yuletide season.
The forceful act was also another mistake made by the Central Bank of Nigeria as the currency jumped to 500 to a dollar, paving the way for more panic and uncertainties. Consequently, this shot the prices of goods and services up in the nation as inflation climbed a 10-year high in the Africa's largest economies.
Panic and Speculations Wake 2017
In 2017, uncertainties become clearer as policy makers, activists, and civil organizations began clampdown on the monetary authority over the allegation of foreign exchange allocations to government cronies.
The job of the Apex Bank Governor, Mr. Godwin Emefiele, was also at stake as the National Economic Council led by the Acting President, Prof. Yemi Osinbajo, 36 state governors and policy makers held him responsible for the spike in Naira rates, which added more injuries to the ailing economy that has entered three consecutive recessions.
Adjusting and Reawaken the Currency
On Monday, February 20, 2017, the Central Bank listened to various voices and relaxed its foreign exchange policy through the introduction of another market rate for travelers, medical attentions and opening of direct sales to citizens in a bid to close the exchange rate gap at official and black market spot (further re-devaluation) in order to save the ailing Naira and the economy.
It pegged the Naira further at a rate as much as 20 percent above the spot price from 305 to 367 against the green-back for medical and school fees abroad.
With the move, the CBN sold $371 million of 30-day and 60-day forwards to banks, almost $130 million less than it offered, which forced the currency to fall down to 490 at the black-market side from 520, when it traded on February 20.
The Apex Bank has been nailing and hammering the currency since introducing the flexible policy in June 20, 2016.
Fast forward, Moves to Merge Official and Parallel:
Source: Bloomberg
The new policy, rather than catering to manufacturers and other business owners, looked at foreign trips and medical treatment of patients for Nigerians seeking to travel abroad.
The economy slide into the third consecutive quarter at the end of 2016 making businesses and aviation industry shutting down and exiting to neighbouring nations due to the scarcity of dollars at their disposals.
The apex bank should try as much as possible to respond to market needs at appropriate time instead of creating panic that may further jeopardise the economy. It should also hands-off from the forex market and allow demand and supply forces to determine its value, but contribute by regulating and making forex available when due.
This will not only unify both the parallel and official markets system, but will also strengthen the local currency against other major currencies of the world, as well as create confidence for investors to strive and play.
If it continues to create panic in the system like before, the system will collapse, while currency may collapse and slump to 1000 to the dollar, as analysts have predicted.
The business of the Central Bank is to create a level playing ground for market forces to interplay, and determine the true value of the naira; anything short of this will nail the Naira on a cross of perpetual collapse.
How It All Started – Flexible Forex Policy
Almost a year after President Muhammadu Buhari took over the government in 2015, the monetary authority hearkens to the cries of investors, analysts, economists, and countrymen by allowing the Naira to float freely at the official market rate on June 15, 2016.
After policy, the currency moved swiftly from 199 at the official rate and 215 at the parallel markets to 300 and over 400 to a dollar at the official and market segments respectively.
Shortly after the sharp fall against the three major currencies – Euro, Pound and Dollar, the Central Bank of Nigeria, headed by Godwin Emefiele, used governmental instruments on the currency at the official market by pegging it at 305 to the dollar. This is despite granting a concession to some businesses, coupled with President Muhammadu Buhari-led federal government's body language, that shocked investors to stay afar as uncertainties mounted over government's 'cosmetic flexible rate policy'.
With the policy and tools employed by the Central Bank of Nigeria, the Naira doubled it exchange rate system to official rate, parallel market, manufacturers rate, Pilgrims, school fees and medical exchange rates.
CBN's Instruments and Clampdown On BDCs
When the spike on Naira at the parallel market became unbearable for regulators, the monetary authority made use of state apparatus to clamp down on the black marketers. This action forced them into hiding and caused more injury to the currency, as shortage of supply extends across the board in a period when families are planning summer break, payment of foreign school fees, most especially the Yuletide season.
The forceful act was also another mistake made by the Central Bank of Nigeria as the currency jumped to 500 to a dollar, paving the way for more panic and uncertainties. Consequently, this shot the prices of goods and services up in the nation as inflation climbed a 10-year high in the Africa's largest economies.
Panic and Speculations Wake 2017
In 2017, uncertainties become clearer as policy makers, activists, and civil organizations began clampdown on the monetary authority over the allegation of foreign exchange allocations to government cronies.
The job of the Apex Bank Governor, Mr. Godwin Emefiele, was also at stake as the National Economic Council led by the Acting President, Prof. Yemi Osinbajo, 36 state governors and policy makers held him responsible for the spike in Naira rates, which added more injuries to the ailing economy that has entered three consecutive recessions.
Adjusting and Reawaken the Currency
On Monday, February 20, 2017, the Central Bank listened to various voices and relaxed its foreign exchange policy through the introduction of another market rate for travelers, medical attentions and opening of direct sales to citizens in a bid to close the exchange rate gap at official and black market spot (further re-devaluation) in order to save the ailing Naira and the economy.
It pegged the Naira further at a rate as much as 20 percent above the spot price from 305 to 367 against the green-back for medical and school fees abroad.
With the move, the CBN sold $371 million of 30-day and 60-day forwards to banks, almost $130 million less than it offered, which forced the currency to fall down to 490 at the black-market side from 520, when it traded on February 20.
The Apex Bank has been nailing and hammering the currency since introducing the flexible policy in June 20, 2016.
Fast forward, Moves to Merge Official and Parallel:
Source: Bloomberg
The new policy, rather than catering to manufacturers and other business owners, looked at foreign trips and medical treatment of patients for Nigerians seeking to travel abroad.
The economy slide into the third consecutive quarter at the end of 2016 making businesses and aviation industry shutting down and exiting to neighbouring nations due to the scarcity of dollars at their disposals.
The apex bank should try as much as possible to respond to market needs at appropriate time instead of creating panic that may further jeopardise the economy. It should also hands-off from the forex market and allow demand and supply forces to determine its value, but contribute by regulating and making forex available when due.
This will not only unify both the parallel and official markets system, but will also strengthen the local currency against other major currencies of the world, as well as create confidence for investors to strive and play.
If it continues to create panic in the system like before, the system will collapse, while currency may collapse and slump to 1000 to the dollar, as analysts have predicted.
The business of the Central Bank is to create a level playing ground for market forces to interplay, and determine the true value of the naira; anything short of this will nail the Naira on a cross of perpetual collapse.
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