Half a decade after Nigeria failed to stop its currency from devaluation, Africa’s biggest economy is again reacting to the crisis the same way it did in the past.
It worked out poorly then as oil revenues, which accounted for a large junk of foreign-exchange earnings, failed to rise in the time leading to a depletion in the Central Bank of Nigeria’s (CBN) firepower (foreign reserves) to defend the naira. It is most likely to happen again if the West Africa nation sticks to the same precedence.
An increase in supply after OPEC failed to agree on production cuts with Russia has combined with demand falling, as the coronavirus outbreak disrupts economies globally.
This means oil prices will remain low for longer than the central bank’s falling reserves can support the naira, which has dropped to the least among major oil-producing countries this year.
The Central Bank of Nigeria has blamed currency speculators for any weakness in the currency and the Economic and Financial Crimes Commission is raiding Bureau de Change outlets to arrest offenders hoarding foreign currencies
Thelma Ugonna, CFA, a financial analyst spoke to Nairametrics in a phone interview recently saying, “With rising uncertainty in the global market triggered mostly by the recent breakout of Coronavirus and the Oil price war between Russia and Iran, Investors’ appetite for holding liquid assets/ cash especially the dollar has risen. This can be seen by the sales of Treasury bills of over N9 billion yesterday even with negative real rates of 8%.
“Investors can decide to hold foreign currencies with a bid to take advantage of opportunistic purchases in the future while others opt to hold cash to reduce their risk against currency depreciation. Cash holdings also help to provide an anchor in the value of portfolios during periods of high volatility.”
Reverting to past measures, Central Bank Governor, Godwin Emefiele plans to tighten capital controls by banning forex for hand sanitizers needed to curb the spread of the coronavirus, adding it to dozens of items already barred from accessing foreign exchange.
However, foreign-currency reserves have decreased by 20% in the past two years to the lowest of $36 billion since November 2017, giving little room for the nation to support the naira.
A currency expert working with Algorithm Algebra also told Nairametrics on phone today that he saw emerging markets in Africa carefully trying to deploy rate cuts at the same time as currency management.
He continued that, “they will continue to utilize their FX reserves to smooth currency volatility, but will not seek to stem the trend or defend any particular levels. In the current environment when external demand is very weak, allowing some currency weakness alongside lowering interest rates is the best way to try and ease overall financial conditions.
However, Central Bank of Nigeria, CBN, recently said it has enough foreign exchange reserves to keep the current value of the naira and warned currency speculators to stop causing panic in the market.
Nigeria’s Central bank also stated it had commenced a robust investigation into activities of speculators in collaboration with the Nigerian Financial Intelligence Unit and related agencies to uncover these persons and dealers behind the panic.