The naira, Nigeria’s currency, has been under severe pressure in recent months, and the Central Bank of Nigeria (CBN), the apex monetary authority, has been struggling to defend the currency against speculators who have been betting on its depreciation.
In previous years, the CBN has adopted several measures to manage the demand and supply of foreign exchange (forex), such as restricting the accessibility of forex for certain imports, imposing multiple exchange rates, and rationing forex to banks. Although all that is changing now with the apex bank lifting the ban on the accessibility of forex and unifying the exchange rates, these measures have not been enough to stem the slide of naira which has lost over 71 percent of its value against the dollar since the beginning of the year.
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However, in a surprising move, the CBN has decided to prove the speculators wrong by clearing the backlog of forex debt that it owes to importers and investors who had bought dollars in the forward market. A forward contract is an agreement to buy or sell a currency at a fixed rate and date in the future.
The CBN had offered these contracts to ease the pressure on the naira but had failed to deliver on them due to low forex reserves. By settling these contracts, the CBN hopes to restore confidence in the naira and discourage further dollarization of the economy.
The CBN’s move has caught the market off guard and boosted the value of the naira, which appreciated to N900 per dollar on the black market on Thursday from N1,000 on Wednesday.
However, analysts have questioned the sustainability and impact of the CBN’s strategy, given the huge amount of forex debt that it has to settle. According to JP Morgan, an American multinational financial services firm, the CBN has $6.8 billion in forward contracts that it has not honoured.
Folashodun Shonubi, the former acting governor of CBN, disputed this claim, although he did not disclose the amount of the outstanding debts.
The firm also estimates that Nigeria’s net forex reserves could be as low as $3.7 billion by the end of the year, barely enough to cover two months of imports. JP Morgan projects that the naira will appreciate to N850 per dollar by December 2023, but warns that this will depend on tighter monetary policy, a more flexible exchange rate regime, and successful clearing of the forex backlog.
Some currency traders and investors may not be satisfied and convinced by the CBN’s intervention and may hold on to their dollars or buy more, hoping that the naira will weaken again due to liquidity constraints and inflationary pressures.
Economists anticipated the effect of CBN policies to trigger an inflow of dollars into the market from individuals who have been hoarding it for profit purposes.
A Nigerian businessman in Washington DC, told Arbiterz on Tuesday that he was withdrawing $65,000 from his retirement account and converting it to naira. He said that he believed that the naira had hit the bottom and that he trusted the CBN’s plans to support the currency.
“It’s a very good time for us who are holding dollar savings. We may never see the dollar buying so much naira again,” he added.
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Businessmen are convinced the CBN’s move has shaken up the forex market and caught many speculators off guard. However, they are not sure whether this will translate into a lasting recovery of the naira.
The recent CBN’s monetary policies have shown that the bank is willing to use all the tools at its disposal to defend the naira, but this may not be enough. It also needs to address the underlying structural issues that have made the economy vulnerable to external shocks.
