“You know what capitalism is? Getting f%&@!&” Scarface
Nairametrics| A lot of words have been used to describe the recent CBN intervention in the retail end of the forex market. Words like “pumping”, “injects”, “flood” have been used intermittently as the Central Banks stepped up its promise to meet forex obligations to Nigerians seeking buy for their overseas travel and to pay for school fees of their wards abroad. So far, over $1 billion has been sold by the CBN and it’s hard to argue that this has not worked. The chart below is evident of the outcome.
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At N420/$1 the exchange rate is now at a 6 months high against the dollar and analysts are now predicting that it may break the N400 support by the end of the week. What exactly is the trigger for all this and why is it important?
- The CBN has about $30 billion in reserves and still growing
- The reserves are also supported by the steady inflow of export proceeds from oil, a product of the relative peace in the Niger Delta.
- The CBN for the first time in over a year is now selling FX to the retail end of the market ensuring that travelers who need FX get it on time and without hassles.
- Banks appear to be complying too, as cases of round-tripping appear to be contained. In fact, we hear some banks are rejecting dollar inflows from the CBN suggesting that a glut in supply of dollars.
- The CBN has also continued sales of FX forwards and is meeting its obligation to its buyers.
The clamour for a currency float is still high as foreign investors believe it is the ultimate panacea to the volatility in the exchange rate between the naira and dollar. How else do you explain a currency gaining N100 or 30% within a month of injecting just less than $2 billion, most of which was channeled to invincibles. The mere fact that the demand for invincibles is strong enough to determine the prices of forex paid for by importers of raw materials lies a major disconnect in our demand and supply dynamics. The exchange rate for $1000 sold in the streets of Lagos is applied to that of $10 million sold by multi-nationals.
But this also shows what is less understood about forex and free markets. It is perhaps not enough to attribute market prices to the forces of demand and supply. Demand and supply are also subject to forces that we fully can’t comprehend and that itself is the reason why economies around the world (including developed markets) do not leave every economic crisis to market forces.
