Nairametrics| In 2015, Central Bank Governor, Godwin Emefiele had an interview with the Financial Times. This was at the height of his FX policies which had just included the banning of 41 items from accessing the FX market. It was also at a time when there was pressure on him to depreciate the naira. We also did a cursory review of the article.
It’s almost two years (one year eight months) since he had that interview and ample time for us to review some of his comments in defense of his policies at the time and if things have panned out has he wanted. Recall, at the time the new government was yet to appoint ministers and was running without a cabinet. There was basically zero fiscal policy at the time.
Looking back at that article, one notices striking similarities in several ways. For example, Emefiele defended his policies (good or bad) at the time just the same way he is defending it today. Another striking similarity is the disposition of banks towards the forex accumulation.
Here are excerpts of the interview that is a reminder that things are the same today as they were two years ago;
FT: There is a lot of volatility in the parallel market. Last week, the dollar was going for 240 naira and now it is below 210.
GE: I’ve always said that the parallel market is a shallow market. The parallel market constitutes just about 5 per cent of the market. It should not be a basis or a benchmark for determining the real value of Nigeria’s currency. And you see what happened. A situation where the bank vaults are full with cash and then banks on their own said, we don’t want the dollar cash, because we don’t know how to get real value for those dollars sitting in our vault . . . because they don’t want it, the market has crashed, from about 240 to as low as 210, 208. That shows you how shallow that market is.
FT: A lot of people say that the policies you introduced in June are actually growing the parallel market.
GE: It’s not the policy we introduced in June or February that is causing it. It is because of the speculative activities, the round-tripping and rent-seeking activities of certain people in the economy, that are creating this.
FT: Did it come from the banks or more from your side?
GE: The banks made the decision themselves after my statement [last week, on illicit financial flows in Nigeria]. They said: “Look, we are not going to take that cash.”
FT: Also, physically, banks are full of dollars. Literally they do not have room for more dollars, is what I’ve heard — is that true?
FT: And you see that as a result of harmful speculation, or?
GE: I think so. Partly.
FT: Some say the parallel market is growing as a result of the new restrictions.
GE: No, the parallel market is not growing as a result of any restrictions because we’ve said that those items are excluded from foreign exchange. By their exclusion, you cannot get foreign exchange from the CBN, from the interbank or from the parallel market so if you have your own funds somewhere in the UK or US you can use that to import the items, we are not going to stop you. But we don’t want you to access those funds here.
FT: Is the solution to problems in Nigeria’s FX market really to close it down and dry up the dollar supplies?
GE: No it will not. What we’re trying to say is that we need to encourage people other than the central bank who earn foreign exchange, other exporters, or people who are bringing in capital to come in and deepen the market better. Those flows will be used for eligible transactions, you cannot use them for ineligible transactions [the import of the 41 specified items]. But we are insisting that those items are ineligible because they can be produced locally and our people must focus — I mean Nigerians or foreigners who reside in country — must learn to respect our laws and our policies and do what we want, which is for them to produce locally because we know they can be produced locally and they are available locally.
Do you see a similarity? Today, information coming out of commercial banks suggest that they are awash with FX and have rejected further attempts by the CBN to sell forex to them. Their FX hoard also includes cash in domiciliary accounts. Incidentally, the parallel market is running wild with the exchange rate closing at N410 per Nairametrics parallel market data. Market operators believe the exchange rate on the black market could strengthen this week and have provided several reasons for it. Just like in 2015, officials of the CBN are also bullish that the current policy is working and expect the black market, which they so despise, to strengthen in sooner rather than late.
However, if history serves us right, indications suggest the black market could further weaken now that banks are awash with cash. The reverse theory is that the more liquidity banks have the higher the price it commands at the black market. One of the reasons why the exchange rate appreciated in March was due to panic selling by forex speculators. The fear was that forex sales by the CBN to commercial banks could extinguish demand in the black market thus creating a disincentive to keep supply going. However, now that banks have so much forex in their vault with fewer than expected demand, some of that cash will find its way to the black market spurting demand as well as price. It’s a wild theory but we have learnt a lot already about this FX market to believe in our theories.
You can read the FT interview here (NB: You will need to subscribe to read it)