Addressing Nigeria’s FX crisis via halting of unethical speculative practices

Over the past 4 months, the Naira has depreciated by more than 50 per cent above the official and parallel market segments after the Central Bank of Nigeria (CBN) collapsed all FX windows into the investors and exporters’ window, now called the Nigerian Autonomous Foreign Exchange Market (NAFEM).

The move according to the CBN was part of government’s  effort to improve liquidity and stability in the market and attract foreign investors into the Nigerian economy.

While the policy was initially widely applauded as it was deemed well intentioned and necessary the first few months of its operation has  put additional pressure on the local currency and manufacturers with its ripple effects on domestic prices.

In response to this challenge, the CBN under the leadership of Dr Olayemi Cardoso, assured it is doing everything to raise the supply of FX.

To prove its commitment, the apex bank announced the decision to eliminate long-standing foreign exchange restrictions imposed on importation of 43 specific items. Almost immediately, the decision nudged higher  by 2.3 per cent to close at N759.20/$1.

However, days later, the local currency retreated, reaching an all-time low of N1,210/$1 in the parallel market, while closing at N793.34/$1 at NAFEM. This substantial divergence between the official and parallel markets significantly widened the arbitrage gap to N416/$1, reflecting the immense pressure in both market segments. But a glimmer of hope beamed as the Naira demonstrated resilience in the parallel market,  appreciating for five consecutive days closing at N1,110/$1 on October 30, 2023.

Nevertheless, the official I&E window saw a depreciation, closing at N993.82/$1.

This remarkable gain in the parallel market indicated potential convergence, with the arbitrage gap further reducing to N117/$1.

Whilst, the Naira depreciated by 0.9 per cent to close at N798.28/$1 at the official window and N1,018/$1 at the parallel market, analysts who spoke to Daily Sun, believe that the CBN’s first strategy of lifting the restrictions on the 43 items, played a huge part in shaping the local currency’s trajectory.

They however believed that the government and the apex bank needed to stop unethical practices in the market which they argue were responsible for the low supply of FX in the market. The Chief Executive Officer, Confederated Facilitators Ltd, Lai Omotola, speaking during a programme monitored by Daily Sun, whilst praising the actions taken by the present administration under President Bola Tinubu, said the government needs to collaborate with the CBN to approach the challenge aggressively.

Omotola stated, “We have not been able to hit the root cause of this challenge rightly. What we have done so far is address the symptoms. The root cause is not in the 43 items which were unbanned but is to find out who is creating the disparity between the official market window and the parallel market. When you look at the demand and supply, there are people on the supply side which we call the market leaders and there are bulk buyers.

What the government needs to do is to find out who these market leaders are because there are people who have a market share in pumping these dollars into the market and determine the price. There are cabals who are pulling the strings in the market. There are speculators in the market who pose as manufacturers and this is not productive”.

He added that if the country is to defend the Naira, it must stop the current unethical practices in the FX market.

According to him, “What we have presently is not the true value of the Naira and I appreciate the fact that the FG, particularly the CBN is doing everything possible to get the economy right back on track particularly on its recent strategies but these strategies have to be sustainable. We have to think of increasing our cash flow because it is the cash flow that the government generates, that will be used to pay off debts and before we disburse the supposed $10 billion if it will come, there has to be a status-quo change in our FX market”.

Re-emphasising the need to build more confidence in the national value, Professor, Political Economy and Management expert and the Founder, Centre of Values in Leadership, Prof Pat Utomi, suggested that cutting costs of policies that serve as bottlenecks to the system will help improve the national market and aid processes like the export system, to favour the citizens.

While urging the CBN to strengthen their oversight and surveillance mechanisms towards practices in the FX market, Utomi stated that some of the steps the government would need to focus on to aid national growth includes, dwelling more on the processing and supply of raw materials globally by taking advantage of the country’s mineral resources thus adding value to them, and creation of policies that support various manufacturing industries.

Conclusion

The present situation on the Naira is an interesting one and credit must go to the Federal Government and CBN as to how they have handled the situation. However by taking decisive actions against unethical practices, Nigeria can work towards stabilising its FX market and ensure sustainable economic growth.