Sunday, October
10, 2021 / 05:53 AM /OpEd by Tosin Ige, Proshare Research /
Header Image Credit: Ecographics
Introduction
Past governments in Nigeria have sought to respond to the
country’s balance of payments challenge by creating a legal parallel (or dual)
foreign exchange market to avoid the short-term effects of a depreciation of
the Naira on domestic prices while retaining some degree of control over
capital outflows and international reserves. However, as the situation turns in
the wrong direction, the government begins to trade blames on the market
players.
In January 2016, the Central Bank of Nigeria (CBN) cut
sales of FX to BDC operators and revised their operational guidelines for
similar reasons stated as in the last two MPC meetings. On March 24, 2020, the
CBN also suspended the sales of FX to BDC operators to avoid excess liquidity
in the system due to a reduction in travels and demand for foreign exchange by
travellers at the peak of the COVID-19 pandemic. The two instances were
transitory as the CBN soon returned to the status quo. Nonetheless, these
instances show the CBN has long been in the business of chasing the symptoms
instead of the causes.
Given the consistent depreciation of the naira against
major foreign currencies since 2015 and its recent sharp decline, the CBN
essentially trailed the same route as was done in previous instances with the
BDC operators and as the FGN did when its clampdown on telephone business
centres during the 80s and 90s when there were shortages of telephone lines in
Nigeria. The CBN is currently hunting the channels, speculators, and platforms
rather than the root cause.
My fear however is that what started as an FX
Conundrum has morphed into a currency crisis that could lead into a financial
crisis; if remedial measures and forward looking strategies are adopted. We
have quite a lot of empirical evidences to back this up and the 1997 Asian
financial crisis comes to mind.
Sadly, from what we saw from the most recent CBN press
conference, their actions continues to accelerate and hurtle us towards the
blowout point. It’s almost like a death wish on their parts. The higher rate of
decline will attract more sellers and the
the rate of decline accelerates even more and goes through the roof.
So, what then shall we do?
Much as we would love to do something, my personal
take is that the macro forces are now in play and there’s very little
individual forces can do, except for those individuals still with some
semblance of “power” – whatever hue that may take. I think the trigger point
will be around the N700/$ mark, which then makes a N1000/$ rate inevitable and
happen faster; by which time the CBN will be overwhelmed. The tsunami will now
move towards other nodes of the system and they too will be overwhelmed…
Read More: Thoughts and Reflections on the Forex Crisis