The threat, earlier this year, by the United States-based international banking mogul, J.P Morgan to phase out Nigeria from its Government Bond Index for emerging markets (GBI-EM) was made good last Tuesday, 8th of September. In response to JPM's "negative alert", foreign portfolio investors, benchmarked on the bank's index, would expectedly become reluctant to lend money to the Nigerian government; furthermore, subsisting holders of our government's securities, may consequently, also hastily offload their stocks and, anxiously seek foreign exchange values to facilitate repatriation of their funds, before the Naira rate suffers further depreciation. Indeed, since Nigerian government bonds are primarily denominated in Naira, holders of such debt instruments may have, lately, lost up to 20 percent of the value of their stock as a result of currency devaluation.
Thus, CBN will consequently, be clearly concerned that a fresh surge in forex demand, triggered by the sudden exit of foreign holders of government bonds, would further deplete CBN's diminishing dollar reserves to ultimately fuel currency speculation which will in turn induce an even weaker Naira exchange rate, and deepen those distortions which have persistently plagued our economy.

Incidently, according to a recent full page advertorial jointly sponsored by the Ministry of Finance, DMO and CBN, JP Morgan had, indeed, earlier in January 2015, expressed concerns on the management of "Nigeria's foreign exchange market"; the three major concerns were identified as, "lack of liquidity for transactions, lack of transparency in the determination of the exchange rate, and also, lack of a fully functional two-way FX market".

Conversely, in the same widely published advertorial, under reference, the CBN denied that it failed to provide enough dollars to match market demand; instead, the apex bank maintained, that it had infact "introduced (responsible) measures to improve the forex market and make it more investor friendly".

Furthermore, the CBN also claimed that despite almost 60 percent drop in oil prices, in one year, and the predictable adverse impact on exchange liquidity, "the Central Bank ensured that all genuine and effective demands for forex, especially those from foreign investors, were met". Instructively, however, despite reduced oil revenue, invisible earnings, such as technical service fees and school fees, dividends, remittances of airlines, insurance, and portfolio investors' capital outflows currently constitute about 40 percent of total forex spending, while our fuel importation bill may account for another 40 percent; curiously, however, payments for finished goods and raw materials imported as feedstock for industrial production probably account for less than 20 percent of total forex expenditure.

Ironically, despite the present relatively meager allocation for imports of goods and industrial raw materials, this same subsector, unexpectedly, recently became the primary target for reducing forex outflow, while much more conspicuous demands for fuel and other invinsible earnings were still favored with unfettered access to forex allocations from CBN, despite the worrisome steady slide in reserves. Expectedly, both the Manufacturers'  Association and the Chambers of Commerce, which form the backbone of our productive economy, are already up in arms against the CBN's allegedly discriminatory policy, as they insist that the ban from official forex access to some of their members would lead to widespread business failures and worsen the already high unemployment rate. These real sector operators, consequently argue that such disenabling outcome, cannot be the reasonable objective of government's efforts to revamp the economy.

Nevertheless, in view of CBN's admission of discriminating in favor of  foreign holders of federal government bonds in forex allocations, the US Bank should quickly provide unambiguous evidence to debunk CBN's claim of adequate market liquidity; clearly, if it fails to provide such evidence, Nigerians may be tempted to see JPM's negative ratings as a calculated ploy to precipitate Naira devaluation, so that those bench marked foreign portfolio investors, who had earlier this year, exited the market with billions of dollars, could return and once more buy up federal government bonds and equity at much cheaper prices than before.

In contrast, however, the expectation of portfolio investors for higher interest rates on government securities is probably more rational, as a hedge against a sliding exchange rate; for example, 15 percent interest rate on government borrowings may not be sufficient to restore the original value of such investments, if the Naira also depreciates by, say 20 percent, in the same year.

Conversely, if government pays over 15 percent for its sovereign, risk free domestic borrowings, clearly, low cost of funds below 10 percent will elude the real sector and challenge the prospect of inclusive economic growth and the creation of increasing job opportunities. Worse still, if the weaker Naira exchange rate of over 15 percent presently demanded by J.P Morgan is embraced, industrial production cost will surely spiral, and drive inflation beyond 10 percent; prices of locally produced goods will generally also become uncompetitive, fuel prices will rise, while consumer demand will also contract to reduce capital investment and deepen poverty nationwide.

Clearly, any promise that a weaker Naira exchange rate would promote industrial and economic growth, must be suspect, as the contribution of manufacturing has, steadily declined historically from over 10 percent in 1983 to less than 5 percent of GDP as the Naira exchange rate persistently lost value overtime  from stronger than N1=$1 to the present N200=$1.
The CBN has nonetheless, also refuted JPN's other allegation of lack of transparency in the determination of the Naira exchange rate, as the Central Bank claims to "have mandated that all FX transactions were posted online...so that all stakeholders can easily verify all market transactions". Furthermore, the CBN claims to have also closed its erstwhile official FX window to ensure a level playing field in the pricing of foreign exchange.

However, critical analysts may observe that the mere publication of the results of forex allocation may not necessarily connote transparency, especially if the process which determines the ruling exchange rate itself remains hazy; indeed, the present system clearly positions CBN as a monopolistic price enforcer!

Finally, the CBN claims in its advertorial to have also sanitized the multiple market abuses, with "the introduction of an order-based two-way FX market which fulfills any genuine customer's ability to pay for eligible imports and transactions". This process, according to CBN, "has, resulted in exchange rate stability in the interbank market and has also largely eliminated market speculation".

Although the CBN's order-based two-way forex market may have stabilised the market, the process does not however reflect the features of an open market, as CBN supplies over 80 percent of forex while also doubling as the sole  origin of excess Naira supply in the economy.
A process where excess Naira supplies constantly chase rations of dollar auctions may not produce a truly open market determined exchange rate.

Although some analysts have concluded that the Nigerian economy will be adversely affected by the withdrawal of foreign portfolio investors, the CBN, conversely believes that the "market for FGN Bonds remains strong and active because its inherent strength  is primarily due to the diversity of the Domestic investor base and not the presence of foreign portfolio investors as presumed!!

Evidently, the humongous Naira liquidity surfeit which CBN readily acknowledges in the system should be adequate to mop up future issues of federal government bonds and forestall the usual economic dislocations precipitated by the hot money flows of foreign portfolio investors.

Besides, CBN's claim to relatively bountiful 'idle' reserves, while our government humbly solicits precarious and fickle funds from foreign portfolio investors, is clearly one of the fundamental contradictions of our economy.