Do allow me give my own opinion on the nice email you may have received from your bankers saying they won’t accept US Dollar cash from you, or transfer US dollars for you outside the country for you from your Domiciliary account anymore.
Banks currently no longer accept US Dollar cash deposits, the official reason? Their vaults are full…Were their vaults not full when oil was $110? So why didn’t they stop accepting dollar cash then?
The real reason is simple, the Naira has lost value.The Central Bank of Nigeria CBN is simply enforcing capital controls via other means. It’s simply a continuation of monetary policy by administrative means
The value of the Naira is based on the value of the foreign reserves, and what builds up the foreign exchange reserves? Exports…exports of what? Crude oil. So at the moment as crude oil prices rise, the Naira rises which, means as oil prices fall, the Naira should fall…So has oil prices fallen? Yes they have
What should then happen is that the CBN should devalue the currency to reflect this new oil price or they “defend” the value of the Naira by spending the foreign reserves in the local forex market.
However the CBN says “We are going to continue to avoid situations where speculators take advantage of the drop in crude oil prices to plunder our foreign reserves,”
So in effect The CBN has chosen to eat its cake and have It., it won’t devalue, and it won’t spend down the reserves, in effect a “no” policy. But the CBN must know that long as oil price is down, Naira has already lost value.
The ONLY thing in the short term that can make the value of the Naira rise is a rise in the price of crude oil….medium term is a reevaluation of import policies especially the CET, long term, we do a lot of import substitution, boost exports, especially non-oil exports.
Administrative actions are Viagra, they “strengthen the Naira, but for how long?
However If we don’t devalue, then speculators will note that the Naira is overvalued at N199 maybe it’s worth N234….so what do they do? They will “sell” Naira at N199 and buy $1 and wait…..If CBN devalues next week to say N230, then these “waiters” would have made 15%.
The CBN again confirms this, they say the “continuous pressure on the foreign exchange is due to the rise in internal demand for the dollar” yes People are buying USD to “wait” aka Speculate.
The CBN response has been reactionary, by targeting domiciliary accounts in banks the CBN is targeting the “waiters”, the strategy being to discourage USD holdings. This is a waste of time, the speculators exist because the CBN actions have created an opportunity for arbitrage. Everyone that holds foreign currency today has already captured value, thus the Naira value must reflect the oil price drop
However lets understands the CBN position, the CBN spent $4.9b from January 2015 to March 2015…surly it will run out of ammunition if it continues to “defend”.
There will be more of these admin policies, and this article does not support or negate “devaluation” or “defense”, but we must have a clear strategy reflective of reality. The markets can adapt to a strong or weak Naira, but they can’t deal with uncertainty…can you imagine what a business man that imports inputs is going through now? The CBN administrative measures only distort the market and cause disruptions, when there is uncertainty what do business do? They slow down and wait, no investment no major decision
If SMEs all wait, if companies all wait, then the economy waits…a $500b economy waiting is never good
It’s our problem, we can fix it
(Photo Credit Invest MentaMoney)
