Nigeria’s local currency, the Naira, strongly rebounded last week, and recovered much of its value, leaving many investors skeptical that the rally will last.
The value of the local currency crashed by more than 20 percent in two weeks after the Central Bank of Nigeria (CBN) announced plans to redesign higher currency notes of N200, N500, and N1,000.
However, the local currency resurged and gained N230 or 25.5 percent in one week, from exchanging at a peak of N900 on Friday, November 4 in the parallel market, to N670 traded late Friday, November 11.
In the review period, Naira also strengthened against Pound Sterling, gaining about N165 or 16.4 percent to N840, from a record low of N1,005 per Pound.
At the official Investors and Exporters (I&E) window, the local currency also recorded modest appreciation against the dollar and other major foreign currencies.
Hitherto high-yield fixed-income instruments (bonds and treasury bills) strengthened as interest yield narrowed across assets. One year tenor bill was allotted at a yield rate of 13.9 percent, lower than the previous 14.5 percent stop rate while the 91-day and 192-day tenor remained unchanged at 6.5 and 8.05 percent respectively.
Before then, fast weakening Naira against rapidly rising inflation had defied CBN’s aggressive mop and intervention measures, with market watchers and analysts forecasting increasing yield to compensate for inflationary pressure.
However, the market experienced calm after CBN reportedly intervened in the forex market with an unspecified amount of dollars early last week and subsequently raised N300.162 billion on Treasury Bill issuance at a weekly auction on Wednesday in one of its mop-up measures.
The question among agitated manufacturers, market operators, and analysts is how sustainable is the sudden rebound of the Naira.
What Analysts Say
The Director General, of the Centre for Development of Small and Medium Scale Enterprises, Muda Yusuf, said Naira’s annihilation and its sudden rise has created serious anxiety and dislocation in the manufacturing sector.
“It has worsened the problem of uncertainty in the manufacturing sector because no one is exactly sure any longer where things are going,” said the former Director General of Lagos Chamber of Commerce and Industry (LCCI).
He noted that the rapid decline in the value of the Naira was triggered by reactions to CBN’s announcement of plans to redesign higher denominations of N200, N500, and N1,000 and concluded that the initial response may have lost steam.
He also noted that in addition to speculations about CBN injecting dollar liquidity in the forex market, and the rumoured news that the US government would no longer admit dollars that were printed in a certain year (2021) as legal tender could have also aided the rapid drop in dollar value, stressing that market thrives on information.
“We are still watching because we’re dealing with a volatile situation. No one can tell how this situation will last. It is still a volatile market.
“But, I think it is rather readjusting back to the level where the exchange rate was before the CBN announcement which triggered the sharp rise in the dollar against the Naira. The most important thing is that the initial reaction to the CBN announcement is beginning to settle,” Yusuf concluded.
On how the situation impacted the manufacturing sector, he disclosed that manufacturers had adjusted upwards the prices of their products on the shelf before the dollar-naira exchange started to normalise back to what it was before the CBN announcement.
“Thinking that the skyrocketing exchange rate would continue, manufacturers had started to readjust prices. It has started to reflect on the shelf because products manufacturers felt that if they are replacing what they have, they will have to replace them at higher prices,” said the productive industry expert.
Also speaking, Tajudeen Olayinka, an investment analyst said the rebound of the Naira can only be sustained if the rise happened naturally by adjustment of the imbalances on both sides of demand and supply.
“If this rise we have witnessed is an outcome of the forces of demand and supply. But we don’t have that information yet. Therefore, it will be too premature to conclude that the appreciation in Naira value is a natural occurrence,” said Olayinka.
The boss of Valmond Securities Limited ruled out dollar supply increase as a possible trigger for the rise and rise of the Naira, stressing that dollar shortages in banks are still a critical problem, citing his personal experience about two weeks ago.
He disclosed that his banker (name withheld) could not process his request for dollars from his domiciliary account in order to complete a dollar-denominated real estate transaction he had started and made half payment, adding that he had to suspend the transaction till further notice.
“I was told that there was no dollar. And that was probably because CBN had not supplied them with dollars. If CBN does not deliver to them, they won’t also be able to deliver to customers. Don’t forget, I was not there to borrow dollars but I went there to take dollars from my dollar account and they couldn’t give me one.
“So, that shows that there is still a dollar shortage, and that is a big problem. If there is still a dollar shortage, I don’t see the rise in Naira value being sustained. What could have happened at the present time is that there is a demand shortage. That is to say, people are no longer buying dollars,” said the investment analyst.
He said that demand for dollars must have dropped because no genuine importer who needed dollars to actually fund his production activities from the black market must have suspended the idea just like he himself suspended his dollar transaction when he couldn’t get dollars from his dollar account.
According to him, it does not make any sense for anyone to actually produce or bring in products that he won’t be able to sell stressing that people don’t have the purchasing power.
“Why would you want to buy dollars at N850 – N900 per dollar when you couldn’t sell the ones bought at N700 per dollar? It doesn’t make sense to go ahead and do that. When forex traders realised that this exchange rate is not going to stay elevated for too long, they started to bring out dollars,” says the CEO of Valmond Securities, a dealing member of the Nigerian Exchange.
According to him, there was a kind of resistance from the productive sector against the continued purchase of dollars at elevated exchange rates when it was realised that the uptrend was a result of panic and speculative activities adding that the clampdown on Bureau de Change by the Economic and Financial Crimes Commission (EFCC) further helped the rise of the Naira.
He, therefore, concluded that the rise in the value of the Naira is not backed by market forces of demand and supply stressing that the country’s dollar earnings from export had not improved.
Global Chief Economist at Renaissance Capital (RenCap), Charles Robertson, said Nigeria is in a difficult position and needs to increase its dollar earnings and other revenue to support the naira. He said Nigeria should hike taxes, and raise more revenue as the country’s current position is so bad that it has never been witnessed in the last three decades.
Robertson, who is also RenCap’s Head Macro-strategy Unit, added: “Things are not looking pretty good for Nigeria and other emerging markets. Oil production in Nigeria has fallen so badly in the last few years and oil price is also about falling more. We are going to see disinflationary policies coming because we are approaching recession,” he said.
Managing Director, of Financial Derivatives Company Limited, Bismarck Rewane, said the naira is falling on the back of heightened forex demand compared to limited forex supply.
He said: “Nigerian consumers, businesses, and individuals alike are facing challenges and headwinds and are reeling in an atmosphere of hopelessness. This is because of a myriad of factors.
“Notably, the precipitous fall of the naira in the forex market, the power supply shortage, and now the almost unaffordable price of diesel.
“In spite of the hike in interest rates, we are witnessing what some analysts fear may become a bout of runaway inflation. Inflation is not just domestic but global.”
