Turbulence in Forex Market

Naira-dollar

August 01, (THEWILL) – The turbulence in the Nigerian foreign exchange (forex) space on July 27, 2021, has created ripples. The effects would reverberate through the second half of the year. The Central Bank of Nigeria (CBN) wielded the big stick against the Bureau De Change (BDC) operators by severing them from its forex supply umbilical cord.

CBN Governor, Godwin Emefiele, in a post-Monetary Policy Committee (MPC) meeting TV briefing, announced the immediate ban on forex supply to the BDCs. He said, “They have turned themselves away from their objectives. They are now agents that facilitate graft and corruption in the country. We cannot continue with the bad practices that are happening at the BDC market.”

Emefiele explained that 5,500 licensed BDC operators across the country were benefitting from the $20,000 weekly forex allocation each. This amounts to $110 million per week or $5.7 billion (about N2.346 trillion) annually for this segment of the market. The apex bank chief said this has become unsustainable. Further licensing of BDC operators was also discontinued.

The CBN governor said that the CBN receives about 574 licence applications from BDCs every month. Those whose applications were undergoing processing would no longer be licensed. Their application fee is to be refunded. The apex bank will henceforth sell forex directly to the deposit money banks with specific directives.

As anticipated following the decision, the local currency slumped at the parallel market, hitting N502/$1 from N500 it had traded prior to the announcement that has received wide support across various sectors of the country including the critical political sector where powerful and influential figures own BDC licenses. The naira fell further to N525 – $1 in the open market but has now gained and exchanged for around N512 -$1 this weekend.

The development has, again, put Emefiele on a hot seat. Depending on who is concerned, he will be applauded and condemned for the turbulence in the forex market.  The darts from the angry public keep dashing towards the direction of the apex bank’s chief.  The BDCs, on another hand, are seen as the naughty players in a game that has stipulated rules. It is all about money and its value; the sweat of people and their store of value.

The BDCs have been greedy and have ashamedly aided the laundering of millions of dollars for corrupt state officials and non-state actors while their irresponsible and unpatriotic acts have made it impossible to manage the naira’s fluid stability against the major foreign currencies. The fact remains that neither Emefiele nor the CBN are to blame for the current forex scarcity in the country. Unless we address what causes the turbulence in the forex market from time to time, it is mere presumptuous and an attempt to clap with one hand toeing this path.

Harbingers of Coincidence

Two critical developments had occurred before the ‘Emefiele July 27 tsunami’, as a commentator described it. Although many did not give them the due attention, they play in the same league of the circumstances that created the ‘tsunami’. They are the World Bank Report on Nigeria’s worst state of unemployment; and the drastic drop in foreign direct investment into the country.

The World Bank report suggests that Nigeria’s unemployment crisis in recent times is the worst in the nation’s history. According to the research paper, the nation’s expanding working-age population combined with scarce domestic employment opportunities is creating high rates of unemployment, particularly for youth. This situation has also been worsened by the pressures of the COVID-19 pandemic.

“Between 2010 and 2020, the unemployment rate rose five-fold, from 6.4 per cent in 2010 to 33.3 percent in 2020. The rise in unemployment rates has been particularly acute since the 2015-2016 economic recession and has further worsened as COVID-19 led to the worst recession in four decades in 2020.”

We are not creating wealth; Nigeria is not generating value to support the population and step up economic growth and development. A recent publication by Dr. Olu Fasan, a renowned political-economist and Visiting Fellow at the London School of Economics, elaborated on the sad fact that Nigeria has a large but predominantly unproductive population.

Fasan showed that a key problem in this aspect is Nigeria’s abysmally low human capital. The World Bank’s 2019 Nigeria Economic Update showed that the country has abysmally poor human capital which ranked Nigeria 161st out of 189 countries in this year’s Index.

“You can build as many passenger railways and roads as you like, if your labour force is low skilled and unproductive, your economy will not grow. That’s why serious governments build physical infrastructure largely with private investors while they build human capital with public funds. China has one of the most highly skilled and productive labour force in the world,”

Secondly, foreign investment has dwindled. The Nigerian Investment Promotion Commission (NIPC) in a recent report revealed that investment announcements in Nigeria declined by 80 percent – fell to $1.69 billion in the second quarter from $8.41bn in the first quarter.

The report had also revealed that the total value of investment interests in the first half of this year fell by $1.57 billion to $10.11 billion, compared with the value recorded in the second half of the previous year.

The experts unanimously blamed unfriendly investment climate, intractable security challenges and acute infrastructure deficit, among other institutional and structural problems as the core factors responsible for the historic nosedive in the flow of FDIs into the economy.

Concerned with these disturbing records of FDI flows, the former director-general of the Lagos Chamber of Commerce and Industry (LCCI), Dr Muda Yusuf, pointed out that diverse institutional, regulatory and structural challenges had eroded investors’ confidence in the Nigerian economy.

Specifically, Yusuf said, “It is investors’ confidence that drives investment, whether domestic or foreign. Investors are generally very cautious and painstaking in taking decisions with respect to Foreign Direct Investment (FDI).”

Universally, FDIs are often long term and invariably more risky, especially in volatile economic and business environments. Uncertainties aggravate investment risk. Investors in the real sector space are grappling with structural problems especially around infrastructure.

He noted that there “are grave concerns about liquidity in the forex market, There are concerns about the accelerated weakening of the currency. There are issues of heightened regulatory and policy risks in many sectors.

“Investors’ confidence has also been adversely affected by the worsening security situation in the country. Meanwhile, our domestic economy is still struggling to recover from the shocks of the COVID-19 pandemic. These are the likely factors affecting investment decisions,” he said.

Diaspora remittances into Nigeria has declined by 20 percent from its annual inflows of $25 billion, this is according to the Nigerians in the Diaspora Commission (NIDCOM).  However, World Bank’s projection of Nigeria’s remittance inflow put the decline at 27.7 percent in 2020. Read more:

And because of the major role that diaspora remittances play in the economy,  the Central Bank of Nigeria has offered an incentive of N5 for every dollar remitted through official channels. But the differing exchange rates often push Nigerians in the diaspora to explore alternative ways of remitting money into the country so that they can enjoy higher value

Exporters’ Lamentations

There is, evidently, a strong emphasis on boosting non-oil revenue through  agricultural and manufactured goods. But players in this sector have nightmares to share regarding export.  Many of them experience severe hardship to use the functional Lagos ports because of the alarming rate of congestion, extortion and poor infrastructure.

Recently, the authorities suspended export of non-oil cargoes to clear the terrible congestion in the wharf.  This led to cancelled orders, loss of money borrowed from the banks and business closure.  When they manage to export, asking them to repatriate their proceeds through the CBN, with about N80 per dollar parity becomes an impossible task.

Insecurity has dealt a deadly blow on agriculture.  The massive job loss arising from the inability of farmers to plant or harvest their crops and earn a living cannot add up to boost GDP.  Farmers and other businessmen who engage in large-scale farming and related activities to support big manufacturing firms under the backward integration policy, have lost out.

Killer Disease

Nigeria has one of the worst public finance management cultures. With over 70 percent of the nation’s revenue committed to debt servicing annually, governments at all levels find it difficult to survive. There is little left for the capital budget after paying salaries which leads to massive borrowing amidst unending chronic profligacy.

A recent report by Cordros Capital showed that due to persistent fiscal slippage, the CBN overdraft extended to the Nigerian Government increased to N13.11 trillion at the end of the fiscal year 2020.

Some rating agencies including Fitch, Agusto & Co had said in separate reports that the monetary policy authority has consistently breached its 5 percent guideline on Ways and Means (W&M) lending. The report noted that fiscal slippage or inability of the government to generate an amount needed to finance both recurrent and capital expenditure resulted in heavy reliance on CBN financing between 2016 and 2019.

Dr Yusuf said that excessive dependence on W&M worsens inflationary trend:

“It has inflationary implications; it is not healthy for the economy because inflation erodes the value of people’s income and affects their standard of living. The value of a currency has a lot to do with poverty and welfare. We must be worried about the fast rate of money supply because inflation triggers poverty,” he said.

“Inflationary environment elevates production costs with adverse impact on corporate profitability, thereby making it increasingly difficult for businesses and corporates to meet their debt obligations to lending  institutions. This translates into a significant increase in credit loss provisions with adverse impact on banks’ profitability.

“We need to caution the government against being too dependent on the CBN for financing deficits because of the high inflationary impact.  Inflation is a terrible thing. When people complain about hunger and poverty, it is because the money they have in their hands cannot buy anything much.”

Way Out

It is a futile endeavour fighting to strengthen the Naira and boost forex earnings when the economy is in doldrums. To generate revenue and boost forex earning, the economy must be made productive and government excess spending curbed.

Nigerian government must curb massive leakages of public funds and ensure that revenue generating agencies are beaten into the line of frugality.  The cost of governance at all levels demands restructuring.  Domestic productive base should be strengthened by robust policies, infrastructure and job creation.

Use of private investors will free funds to address human capital in the areas of health, education and skill acquisition.  Insecurity which has killed businesses and scared investors should be addressed frontally. Job creation through increase in CBN interventions will boost the GDP and heal the economy.  Poor power infrastructure is a missing link and must be addressed.

According to Fasan, “Nigeria needs regional economic powerhouse. It needs strong regional governments that can harness regional comparative advantages and economies of scale to boost productivity and growth.  That’s an antidote to poverty and an effective way to manage a large, diverse population.”