Market News

By Uddin Ifeanyi

Given how poorly the balance on our reserves is, intervention through BDCs is at present more show than substance. On balance, therefore, it is difficult to assume that the pressure on the naira will abate in the near- to medium-term. If, however, there are recognised paths to this outcome, the CBN is currently on the fastest route in the light of congestion at the traffic nodes highlighted.

The gaiety with which the Federal Government’s boosters roll out numbers in support of their preferred account of a rapidly recovering economy is as beguilingly infectious as it is hostile to the task of fixing the economy — it often takes for granted the existence of impossible contradictions with critics of government’s policies. This way, it attenuates the pool of ideas without which proper solutions to the economy’s problems will be harder to find, and the buy-ins required for these to work impossible to cobble together. Nowhere has this dilemma been more manifest of late than when answers have been sought to the question, “What magic is happening to the naira’s exchange rate and is it sustainable?”

In the last 30 days, the naira’s exchange rate has retreated from the record levels it had fallen to against the greenback since rates were floated in the foreign exchange markets last year. While nowhere near the levels they were at the beginning of 2023, the new rates and its general downward trajectory promise relief to the myriad problems (rising prices from higher imported inputs cost, for one) that the economy has had to deal with from the recent rapid devaluation of the national currency.

With last week’s two percentage points increase by the Central Bank of Nigeria’s (CBN) policy committee of its policy rate (to 24.75 per cent) — now up a cumulative 600 basis points since the beginning of the year — the effective yield on treasury bills moved north of 31 per cent annually. For commentators on the economy who had long since skreiched for higher cost for money in the domestic economy (in the teeth of the unorthodox monetary policy stance of the CBN up to last year), their main line of reasoning was precisely in pursuit of this effect.

A third reason for the naira’s price recovery in the foreign exchange markets, is that the CBN swears by Mammon that it has met outstanding dollar obligations to key sectors (banks and airlines) of the economy. The latter, on the other hand, swear by Plutus (sotto voce, regrettably) that this is not the case. Anecdotal evidence appears to plump for the latter.

Even now, retail demand in the country for US dollars is still a precautionary one — the naira having ceased to be a store of value, most Nigerians with means sought a refuge for their wealth that is ring-fenced from inflation. At one point, it was cryptocurrencies, as arcane as this asset category still is. Beyond the law-and-order instinct (clamouring for the prompt arrest and detention of alleged economic saboteurs), the more urgent business of the day for the Tinubu administration was always how to nudge Nigerians to keep their wealth in naira. Short of shooting every domiciliary account holder, the sensible option was to reward naira holdings above the rate of inflation.

Treasury bill yields are close to being inflation-proof right now. Unsurprisingly, monies that previously flowed into dollar-denominated assets are choosing (following improving yields) to remain in naira-denominated assets. There is a second consequence of less accommodative monetary conditions. When economic actors buy treasury bills, they get a paper acknowledging their loan to government. Consequently, the naira with which the bills are purchased is no longer available to the buyers of the bills to spend. However, the money is available to government to spend. And our history since 1960 has been of governments lacking the fiscal discipline necessary to maintain and drive up the economy’s allocative efficiencies. Indeed, we are paying (in today’s higher prices) for the licentiousness of Mr Buhari’s eight years in office. And so, going forward, the CBN must be willing to put up rates when government’s spending is inflationary, and vice versa. Of course, one effect of rising rates is to choke domestic demand.

A third reason for the naira’s price recovery in the foreign exchange markets, is that the CBN swears by Mammon that it has met outstanding dollar obligations to key sectors (banks and airlines) of the economy. The latter, on the other hand, swear by Plutus (sotto voce, regrettably) that this is not the case. Anecdotal evidence appears to plump for the latter. In which case, the sheer quantum of the demand by these economic actors for dollars will continue to bring downward pressure to bear on the naira’s exchange rate. Beyond that, though, the damage to business sentiments from this velitation is not in the economy’s best interests.

Now, how, and what do these trends speak to the sustainability of the naira’s current trajectory? The lag between when a central bank begins to raise interest rates and when inflation starts to trend down is all of 18 months — give or take two months either side. Put differently, then, given the contrary effect on output growth of rising interest rates over that period, including a rise in banks’ non-performing loans, do we think the CBN can stay its current course?

Finally, the CBN has resumed selling dollars to bureaux de change. These are currently middling sums, however. And thus, the utility of this expedient is simply as a signal of a gradual return to normalcy. Concerns over how much of the advertised balance on the gross external reserves is available to support the CBN’s intervention in the market remains.

Now, how, and what do these trends speak to the sustainability of the naira’s current trajectory? The lag between when a central bank begins to raise interest rates and when inflation starts to trend down is all of 18 months — give or take two months either side. Put differently, then, given the contrary effect on output growth of rising interest rates over that period, including a rise in banks’ non-performing loans, do we think the CBN can stay its current course? If the apex bank is not honest about the degree to which it has covered due forwards, it is only a matter of time before this pressure tells. Given how poorly the balance on our reserves is, intervention through BDCs is at present more show than substance. On balance, therefore, it is difficult to assume that the pressure on the naira will abate in the near- to medium-term. If, however, there are recognised paths to this outcome, the CBN is currently on the fastest route in the light of congestion at the traffic nodes highlighted.

Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.