Why the CBN is panicking about the exchange rate

Over the weekend, the Central Bank of Nigeria, CBN, issued a surprising circular. It “warned” banks and Bureaux De Change operators to ensure that they sell forex to Nigerians looking for Personal Travel Allowance (PTA) or Business Travel Allowance (BTA).

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To show how serious the CBN was about its circular, the Governor himself, Godwin Emefiele paid surprise visits to First Bank, UBA and Zenith Bank to monitor compliance.

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In his remarks during the visit, he reiterated to those looking to get forex to “Just walk to any bank with your travel document, show your Visa and air ticket. They will ask for your BVN and once they verify it, they should attend to you on the spot.”

So, why is the CBN suddenly sending out frantic instructions to banks and BDCs? We have a few suggestions.

Emerging Market sell-offs

The United States dollars have strengthened against major emerging market currencies in the last few days. This has triggered a sell-off in most emerging markets like Argentina and Turkey and there is a palpable fear of a contagion in markets like Nigeria.

We already see a clue that this is happening with the stock market closing with losses for 8 straight days and 10 out of 11 days of trading. The market is about to close May for only the 9th time in about 33 years. It is likely that foreign investors are selling off.

Black market depreciation

The exchange rate at the black market depreciated to N366 in the last one week. It has hovered between N362 and N363 for months. The sudden depreciation of the naira is said to have spooked folks at the CBN sending them into a temporary panic mode.

The black market is often seen as the precursor for where the official exchange rate might be trading in the future, thus the CBN is taking no prisoners. The retail end is where BDC’s and commercial banks sell to business travelers so it is not surprising that the CBN is taking the latest depreciation rather seriously.

Election fever

Since President Buhari announced that he is running for a reelection earlier in the month, the market has been worried about the impending consequences. Investors are worried that the stakes are so high that politicians may start to stash up forex ahead of election spending.

Forex is typically the currency of choice for politicians looking to sway king makers and party stalwarts, so it is likely that the lure of this demand could trigger another round of hoarding by banks and BDC operators. This is perhaps why the CBN is “warning” them to make sure they sell their suppliers to “genuine” buyers.

European Markets

The international market is currently worried about what is going on in Italy. An expected coalition collapsed leading to an inevitable election in the next few months. It is believed that a reelection might usher in a populist government. This uncertainty is causing markets to retreat. Retreats also affect foreign portfolio investments into emerging markets like Nigeria.

World insecurity

Global insecurity and uncertainty also have a huge role to play in all of this. The status of the Iran Nuclear deals has made the world a lot less safe. The bombing of Syrian territories by Israel is increasing tensions and unrest in the middle east. Donald Trumps anticipated meeting with the North Korean leader is also a major concern to the global community considering the controversies surrounding it and how unpredictable the outcome is.

Also, global prices which rose past $80 per barrel earlier in the week dropped to under $70 as word of an increase in crude oil output from OPEC and Saudi Arabia spooked markets. While this does not have an immediate impact on the naira, the unpredictability of events around the world is also affecting decisions on capital inflows to emerging markets like Nigeria.

@Nairametrics

Nairametrics