Is the naira under attack?

One question that’s been on our mind for the last one week is this – Is the naira under attack? Over the last 12 working days, we have seen the parallel market exchange rate depreciate from N528 to the dollar on the first day of September to N562 to the dollar as of September 16, 2021, according to Abokki FX, a local online platform that tracks black market rates.

Our sources on the streets also confirm the rates are about the same while rates for wired transfers are said to be much higher at just above N570/$1 depending on who is selling.

The last time we saw this sort of rapid depreciation of the exchange rate was in early 2017 when the exchange rate moved from about N450 to over N500 to the dollar. It subsequently fell to about N365/$1 after the central bank introduced a policy to usher liquidity into the system. But that was four years ago when we had a different economy.

The current depreciation dates back to July 27th after the central bank Governor issued a sharp rebuke of BDC operators and banned the sale of forex to them. Mr Emefiele had accused them of creating artificial scarcity in a bid to seek “abnormal” profits thus introducing risks to the Nigerian financial system.

He further chided them for carrying out activities that were unhelpful to CBN’s price stability objectives such as rent-seeking, saying that BDC operators were only interested in large margins, dollarization of the Nigerian economy, subversion of the cashless policy, common ownership of several BDC by the same owners to obtain multiple FX, and ‘regrettably’ international organization and embassy patronage of illegal FX dealers.

On that day, the exchange rate was trading for N505/$1 and spiked to N520/$1 soon after he made the announcement. It raced to N525/$1 two days later. At this current trajectory of daily increases, we could be hitting N600 before the end of October. It’s easy to pin the pacy depreciation to the ban on the sale of forex to BDCs but we think it could be a more sinister set of dynamics.

We believe speculators are bidding up prices to force action by the central bank. We have no proof and this, by all means, may be wide off the mark in terms of what is actually the causative factors. But this hypothesis is plausible and a few of the analysts we have spoken to believe this too.

A major reason why bidders will be willing to pay any rate to buy the dollars is part of speculative tactics termed “pump and dump.” This is essentially, pumping up the exchange rate higher until those who have taken large positions exit just in time before the crash. Currency attacks are not new around the world. The famous attack on the UK Pounds by George Soros is taught in business schools.

There is also the familiar factor of rising demand especially from parents looking to pay school fees for their children who are abroad. Businesses are also scrambling for whatever forex they can lay their hands on to finance imports. With forex still short on supply in the investor and exporter window, they will keep relying on the black market to meet their demands. Unfortunately, they are the ones bearing the brunt of the speculative attacks, assuming this is the reason.

What can the CBN do?

The CBN believes the black market represents a very small part of the forex market and should never be used as a benchmark for the price of forex. Rightly so, but this assertion is hardly the reality of people who buy and sell forex outside of the banking system. Thus, it is unclear if they even consider the depreciation a risk of any kind.

The monetary policy committee of the central bank will issue their communique on Friday. Whatever happens on Friday will set the stage for the next trajectory of the exchange rate. They could move to depreciate the official rate or collapse the multiple FX windows or lift the ban on BDCs. They could continue with the status quo or move further right by tightening even further, thus, defying the speculators.

One option could be to raise interest rates high enough to make the naira interesting to invest in. Throw in some liquidity in the mix and we could be seeing a different but perhaps positive outcome.

We don’t know what cause of action they will take but what we do know is that whatever actions they decide to take will impact the naira positively or negatively.

For now, we wait to see how much longer the naira can withstand this unprecedented depreciation at the black market.


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