The Central Bank of Nigeria has injected over $10.97bn, into the Forex Market between January and October this year, to defend the Nation’s currency, the Naira, against other major currencies, including the dollar.” (Punch Newspaper report of November 18th 2018 titled “CBN Defended Naira with $11bn in 10 months”).

The Punch report, explained that “the $10.97bn figure was arrived at, by our Correspondent, based on the weekly compilation of amounts released by the Apex Bank to boost liquidity in the foreign Exchange Market.”

The CBN’s Director of Communications, Isaac Okorafor, also noted, according to the same report that, “the availability of the dollar and the Renminbi (the Chinese currency) had reduced the pressure in Nigeria’s Forex Market;” consequently, Okorafor assured Nigerians that “the Apex Bank would sustain its intervention,” not minding the impact on size of reserves, “until there was enough liquidity in the market.”

The foregoing narrative may suggest that forex liquidity is seemingly, the main driver of exchange rate volatility. Notably, however, the estimated $20-$30bn annual inflow, from Nigerians, in the Diaspora, may not have been captured in the $10.97bn, quoted above as CBN forex sales between January-October. Thus, the total monthly average inflow into Nigeria’s forex market may actually exceed $3bn. 

Notably, however, a cursory examination of CBN’s forex reserves, indicates that Naira exchange rate bears minimal correlation with the size of “CBN’s External Reserves or forex sales;” thus, rising reserves do not translate to stronger Naira rates! For example, in January 2012, total External Reserves, was over $34bn, while Naira exchanged for about N155/$1, but later slumped, unexpectedly, to N161=$1, when forex reserves rose well above $43bn!

Similarly, in 2013, External Reserves had become bolstered and fluctuated between $45bn in January to $42bn by December, yet Naira rate remained stuck, between N153-N162/$1. Furthermore, the Naira rate, actually, weakened to N170-N199, in 2014, even when external reserves trended favourably, between $40bn-$34bn. However, when Reserves dipped as low as $25bn in 2016, the Naira which, was trading around N197=$1 in January, was officially devalued to N305-N360=$1 before December, while the economy was, officially also confirmed to be in recession.

In retrospect, however, Naira rate was as strong as N84=$1 between 1995-98 when total reserve was, conversely, a very modest $4bn. Similarly, when one Naira exchanged for almost $2 between 1972-1984, official forex reserves was barely $390.71m!! (Not billion!).

Instructively, however, since 2017, Reserves have climbed again above $40bn, but Naira rate, appears inexplicably stuck between N305-N360=$1. The obvious question therefore is, if dollar rate rose well above N300=$1, because reserves dropped below $30bn in 2015, why then, has Naira remained static between N305-N360, even after reserves climbed, once again and remained stable between $40bn-$47bn, when crude price actually exceeded $70/barrel and provided possibly over 30 months cover to pay for imports; that is, if CBN continues, “to defend the Naira” with $1-$2bn every month. 

It is sadly becoming obvious that CBN’s strategy of bombarding the forex market with dollar reserves has, as usual, once again, failed to stop Naira depreciation, even when higher crude oil prices, significantly increased reserves beyond, the 2018 reviewed budget benchmark of US$50.5/barrel.  

Although CBN’s Communications Director, Isaac Okorafor, indicated exchange rate stability as priority, rather than size of reserves, invariably however, rapid depletion of CBN’s reserves would perfunctorily precipitate market panic and induce further reserve erosion, which could, ultimately, compel another huge devaluation of Naira below N500=$1. The social and economic impact of such a rate will inevitably fast track more Nigerians into poverty, and sustain our Nation’s odious title as the reigning “poverty capital” of the world!

It seems rather macabre also that, CBN willfully depletes its stock of reserves to defend the Naira, through its regular, weekly auctions of hundreds of millions of dollars, to all and sundry at face value, while Government, conversely, simultaneously seeks dollar loans and pays upto 8 percent, as interest on such debts, despite CBN’s heavy cache of idle dollars! 

The Bureau-de-Change market segment has invariably become a major beneficiary of CBN’s dollar sales, even when it is very clear, that dollars allocated to BDCs facilitate the transfer of looted public funds abroad.

Notably, the present administration has, inexplicably, obtained a fresh $3bn foreign loan recently (November 2018) to compound the existing $10bn that it had already borrowed with over 7 percent rate of interest, since it assumed control in 2015, even as CBN still carelessly broods over an unencumbered nest of over $40bn, from which, it regularly auctions rations of dollars at face value, to purportedly, determine and stabilize Naira exchange rate!

The following are excerpts from the above title “The Wrong Way to Defend the Naira,” (see www.betternaijanow.com) which was first published in Vanguard and Independent Newspapers, in April 2011, to reflect the perspective of the contradiction of higher External reserves when the related Naira exchange rate, inexplicably, conversely, remains sticky and under siege, even when reserves significantly exceed budget benchmark. Please read on.

“In practice, the Naira exchange rate is actually more a function of unyielding Excess Naira liquidity, in a strictly regulated market, in which small rations of dollars, are auctioned intermittently by CBN. Regrettably, such a market model will only spell disaster for growth and deepen poverty nationwide.”

“Notably, however, in his acceptance speech, as Silverbird TV’s  ‘Man of the Year’ for 2010, CBN Governor, Lamido Sanusi specifically ‘blasted’ IMF for inducing inappropriate policies that distort and repress our economy with little or no opposition, from Nigeria’s economy managers, who allegedly, did not have the ‘balls’ to look the IMF in ‘the face’ and reject their poisonous pills!  Consequently, Sanusi rightly rejected IMF’s recommendation, as he saw no observable benefits in a weaker naira, which would expectedly “trigger higher industrial production costs, fuel inflation, increase fuel prices and subsidies and increase our national debt burden.”  

“Undoubtedly, Sanusi’s argument with regard to the need for a stronger naira value is more plausible; but, the real question is, whether or not Sanusi can keep naira below N155/$1 within the context of the present framework that explodes Naira supply (excess Naira liquidity), whenever distributable dollar revenue is substituted with monthly naira allocations to the three tiers of government?”  

“This column has consistently maintained that naira substitution for dollar revenue is the poison in our economy, as it engenders a system that makes our economy and people poorer, even when we earn increasing dollar revenue; a veritable paradox if there was one!”

“Excess liquidity, is driven by the traditional ability of banks to expand their credit capacity by leveraging on the hundreds of billions of Naira deposited with them every month, through government allocations. Thus, the higher crude oil prices are, the greater will be the distributable dollar revenue, and the greater also will be the Naira balances deposited with banks, to expand their capacity for credit. Furthermore, such increasing liquidity and access to credit, would unreasonably and counter-productively invoke the need for higher CBN monetary policy rates, to restrain credit expansion by banks so as to choke inflation. Notably, the Naira liquidity surplus in turn, also induces higher commercial lending rates, which will drive higher inflation rates and invariably contract consumer demand. Ultimately, industrial output, productivity and growth will suffer while unemployment would further rise.”

“However, the self-inflicted plague of excess liquidity can be avoided with the payment of dollar revenue allocations with dollar certificates rather than with humongous naira values which induce a train of adverse consequences!  The naira will effortlessly become stronger, with this approach, while interest rates and inflation will fall to single lower digits; industrial costs will also fall, and consumer demand will expand with significant rise in employment.  However, if CBN remains in denial of this reality, invariably, IMF will have the last laugh, as naira devaluation will become inevitable with dire consequences for industries, employment and price stability with deepening poverty as a product!!”