Nigeria’s rigged FX markets threaten economic rebound

Nigeria’s rigged FX markets threaten economic rebound

When the Organisation of Petroleum Exporting Countries (OPEC) decided last Wednesday to cut production after a meeting in Algiers it led to a surge in the currencies of oil producing nations.

The Canadian dollar (CAD), Russian ruble and Norwegian krone (NOK) led gains on the day of the decision while the Brazilian real (BRL) and Mexican peso also advanced.

The loonie (CAD) jumped 0.8 percent to C$1.3097 per dollar at 4:19 p.m. in New York, its biggest advance in more than three weeks.

Crude meanwhile surged 4.5 percent to $46.70 a barrel in New York after rising as much as 6.2 percent earlier in the day.

In Nigeria which vies with Angola as Africa’s largest economy, and relies on crude for 90 percent of exports, the local currency the Naira (NGN) sank to an all time low of N460 per dollar, at the parallel market, with analysts and traders expecting it to test the N500 per dollar mark in coming days.

At the government sanctioned FMDQ OTC securities exchange where the Naira is supposed to trade freely, only some $1.44 million had exchanged hands as at 12.50 pm, on the day following the OPEC deal (Thursday).

Average price of transactions remained stable at mostly N305 per dollar, with one deal executed at N315, data from the exchange showed.

The lack of volatility or surge in trading volumes for the USD: NGN following the groundbreaking OPEC deal is a clear indication that Nigeria’s new FX market is neither market driven nor trading freely.

This implies that rather than let the markets determine the Naira’s true level the Central Bank of Nigeria (CBN), has merely shifted the USD: NGN curve to a higher level (N315 vs. N199).

Spot FX market trading has been steadily falling since a peak at the end of last month.

Trading activity in the Spot FX market between banks and their clients has averaged $125 million a week so far this month, according to data from the FMDQ.

This compares to pre 2015 when the weekly average turnover was at about $1 bn.

The lack of volatility in the Nigerian Naira has been labelled suspect by most corporate treasurers and even members of the CBN monetary policy committee (MPC).

“It is unduly optimistic to expect international investors to be attracted to Nigeria until policy credibility and consistency is not only restored but also successfully maintained. Indeed, initial implementation of the supposed flexibility in exchange rate determination simply saw movement from a ‘hard’ peg at N197/US$1 to a “soft” peg in the range N282-284/US$. This, in my view, sent a needlessly negative signal…The ‘market’ rates for Naira are in my view an over-adjustment given the fundamentals of the economy,” Doyin Salami an economist and member of the MPC,  said in recently released minutes from the committee’s July meeting.

 

Meanwhile the Nigerian economy continues to haemorrhage with no end in sight to the dollar shortages which are being exacerbated by the CBNs continued restrictions on free currency trading.

The economy went into recession after contracting by 2.06 percent in the second quarter (Q2) and according to Standard Chartered so far in Q3, there is little evidence of a significant recovery momentum.

“Production, new orders, employment and order backlogs have all declined, according to our August survey data. Of the components that make up the headline BSI, only supplier delivery times increased, but after having hit a series low only a month prior. Nigeria’s traditionally buoyant expectations are starting to falter. Although an economic recovery is anticipated, the strength of the optimism is fading. In August, eight of the 15 current conditions indicators declined, while 10 of the future expectations measures were down from previous levels,” Standard Charted Bank analysts led by Razia Khan, said in a Sept. 01 note to investors.

With dollar reserves falling, net inflows still negative and a collapsing currency; Nigerian monetary authorities must let the Naira trade with lock in step with fundamentals or risk a prolonged recession.

 

PATRICK ATUANYA

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