Business What Other African Countries Having The Same Currency Crisis as Nigeria are Doing

[LequteMan]

Nigeria is not the only country currently experiencing a currency crisis, Angola, Egypt, Uzbekistan and Tajikistan also have their local currencies under extreme pressure. (click here to read more about that)

However, here's what the two African countries in the same situation are doing:

Egypt – Egypt’s ability to defend the currency with reserves has been crippled since the so-called Arab Spring uprising five years ago triggered political instability, drove out foreign investors and curbed tourism, one of the country’s biggest sources of hard currency.

The Egyptians Pounds remains under severe pressure despite being devalued about twice last year.

Since taking over as central bank governor in November, Tarek Amer has sought to shore up confidence in the pound in part by paying foreign stock and bond investors the money owed to them that had been trapped in the country and by limiting some imports.

Just like Nigeria the country has restricted sale of dollars to approved imports and instilled capital controls that have effectively shut out other importers.


Angola – Angola like Nigeria is reeling from the effect of the crash in crude oil prices as it relies heavily on oil with over 95% of its revenues coming from sale of crude.

The country has even devalued twice in the last one year (24% in 2015 and 15% this year) yet the premium between the official rates and black market rates is as wide as 136%. The obvious reason for this is its currency controls and its decision to hold on to a fixed exchange rate. If it decides to relax controls, its reserves will deplete and if it tried to float its currency inflation will spike and most companies could run of out business.


Bloomberg

 

[Efua Gbadamosi]

It is an extreme concern to have Nigerians sway under the weight of devaluation of the naira and inflation despite the tight FX control mechanisms being engineered by CBN till date. In my view, we have two options either to continue with tight monetary Control Mechanisms or allow the Floating Mechanism to determine the exchange rate of the naira. We have had tight controls since June 2015 and inflation and devaluation have still soared. Many factors determine the value of the currency (called the fundamentals) such as interest rates, inflation rates, BOP(terms of trade), Government debt, Speculation, External reserves etc, Based on these fundamentals the naira should not experience the level of depreciation we have seen as at today it is over N340/USD! I say this because, yes crude price has dropped thereby thinning our crude revenue but the FGN has also gained by this event, as it no longer spends its revenue on subsidies and other progressive tax has been invented and collected directly from source (such as the stamp duty on Bank transfer of over N1,000). What it then means is that common Nigerian citizens are now subsidizing the government, because we are paying more than the market price for petroleum products. Without further digression, I think the USD is overpriced due to speculations based on poor Monetary policies to control the FX and not entirely due to the other fundamentals that determine exchange rates. I believe we can escape these FX quagmire in the short term by temporarily using the floating mechanism to set an equilibrium on the value of the Naira, because many FX transactions are occurring outside the banking system now stifling supply of the FX into the economy among other methods being adopted by FX users to continue in business. I know the floating mechanism would result in inflation hence the need for its temporary usage. In the short term it should be complemented with a fiscal policy by targeting the productive sectors (Agricultural and allied businesses, manufacturing companies etc) and give these economic sectors tax rebate/holiday, import duty exempt etc to cushion the shock of the envisaged drastic FX fluctuations. Then those goods that have pure import contents will be left with no choice but to engage in backward integration. This FX paucity should not be a minus for us Nigerians but with the right policy mix (fiscal and monetary) and nicely executed strategy we should be able to reinvent our country for good in this dispensation of time!

 

[LequteMan]

@Efua Gbadamosi I think the naira will be worthless if a floating mechanism is employed. There's so many negative speculations and feelings out there. People are looking to make heaps of cash via the exchange rate by doing virtually nothing. Even Nigerians with as much as $1 stashed somewhere want a devaluation.

Hence, employing a floating system will see the naira fall to as low as 500 per dollar as Nigeria is an import-based country- we import almost everything we use.

I'm not saying things should be left as it is. I believe things will be better if Nigeria produces more. We need to start producing quality goods and change our mentality. More important, government needs to work more to strengthen the ease of doing business in the country and fiercely support indigenous startups and companies. Glo should be the largest shareholder in the telecoms market, not MTN.

What about the brain drain? There's too much to talk about. Everyone must do their part, else we're in for a shock.

 

[Efua Gbadamosi]

Lequte, permit me to continue in this discuss by stating that our current economic situation needs short, medium and long term interventions to move Nigeria to its desired haven, what we are facing right now is purely panic buying of FX or speculations if you will, the only way to quell this unnecessary uproar and FX dust being roused is to take drastic short term corrective measures to bring us to the long term measures. whether we like it or not the naira is already devalued and inflation rate is fast climbing, we are paying more for goods and services as we speak. We are in a perculiar situation, Nigeria is not as broke as we are made to believe in some quarters, some revenue are still coming in, Leakages are being plugged, government is making some gain in non payment of subsidies, lets take an interim position and leave market forces as a short term measure to determine the equilibrium price and then CBN can continue with a managed float mechanism. In order to reduce the impact, by curbing inflation for consumer goods that would affect masses just like you mentioned if the exchange rates get too high, you give incentives directly to those industries/sectors/consumer goods producers through the use of a fiscal policy, like i mentioned in my earlier post. Every country has its competitive advantage, no nation can do without importation but Nigeria is import based due to other supports that are lacking to support localisation (which i need not mention as we are well aware of the deficiencies in this area) . Instead of thinking of how we can defend the naira with the hard earned FX it should be ploughed to capital investment and other productive sectors that can improve the lives of average Nigerians. Mind you, a lot of rent seekers are already benefiting from the huge margin between the parallel FX market and the CBN price it is unbelievable!(but true as far as Sanusi Lamido is concerned). I agree with you that we cannot continue like this, the economy is in standstill, people have goods they are not selling, even medical suppliers cannot get in their goods into the country, those who have goods at all are selling increased prices. It is either you buy or take a walk and traders rather want to hold on to their goods than a depreciating naira.
I can tell you the expected impact of a float system, in the short term rates would increase but would eventually go down when the free supply of FX resumes. Right now supply is really stifled, ask any informed player in the FX market segments they will tell you that for free. Note that FX supply is not just CBN we have others like export proceeds, FDIs, foreign loans etc.

Lequte, saying we should not take our chances with tweaking the Float system to fit our situation to determine and achieve the reality of the true value of our naira would mean burying our heard in the sand like the ostrich and wishing this whole FX disillusionment away... which is not good for our economy, not good at all!

 

[LequteMan]

Efua, You've said it yourself. Localization.

I'm not against the idea of using a float system. However I'm pretty sure it'll make the Naira totally worthless whenever it's implemented- there's scarcity, remember?

It might be a good thing if it's implemented and govt starts supporting local industries and SMEs massively. The naira would fall and may start appreciating as manufacturers and others look less to importation as their raw materials are readily available in Nigeria. Otherwise, it'll be a disaster.

Or better still. Govt can leave things as they are and start fiercely supporting local industries and SMEs. That'll ease the pressure on the naira and it'll definitely start appreciating.

In summary, a floating system will work in the short term and probably long term if we import less. A whole lot less.

Don't get me started on those rent seekers. I might break something expensive around me and I'm broke at the moment.

It is useless and downright unwise defending the naira with hard earned FX reserves, CBN should've known better.

 

[Efua Gbadamosi]

Down! Down! Down! goes naira at N400 to $1
http://businessdayonline.com/2016/02/down-down-down-goes-naira-at-n400-to-1/
Lequte you need to read this, curled from Business Day this morning. the dollar is already N400 as at today despite the tight controls!

Nigeria’s naira extended its fall to a record low of N400/$ on the black market on Thursday as demand for the U.S. currency increased amid a plunge in crude oil prices and foreign exchange restrictions by the Central Bank of Nigeria (CBN).

“The naira is being killed with it trading at N400/$ in the parallel market. We have wrongly legitimised the parallel market,” said Bola Onadele Koko, CEO of FMDQ OTC exchange in response to BusinessDay’s questions.

“We need to design a new Framework anchored on reduced significance of the parallel market, a single FX market, renewed inflows and CBN’s naira support through futures hedging. We need to move fast before we have bigger macro issues.”

Nigeria’s Central Bank stopped selling foreign exchange to Bureau de Change dealers last month, the latest in a series of controls aimed at supporting the naira at a fixed peg of N197-N199 per dollar on the official interbank market since March last year.

Africa’s biggest oil producer has restricted foreign currency trading at banks, causing a shortage of dollars in an economy that imports most of its manufactured goods, sending the unofficial rate soaring.

Crude sales accounted for about two-thirds of government revenue in 2014 and about 90 percent of the nation’s foreign currency earnings.

“We have lost some lead time from when the elections were won and when the full cabinet of the present administration was put in place,” said Oluwatoyin Sanni, Group CEO of United Capital Plc in response to BusinessDay questions.

“There is no policy response that will not lead to pain for all of us, but the authorities must know that uncertainty is not good for markets,” Sanni said, in Lagos.

Nigeria’s stock index, which has the second-biggest weighting after Kuwait on the MSCI frontier market index, has declined by about 16 percent since January due to investors concerns over the naira’s depreciation and the unwillingness of Africa’s biggest economy to adjust its exchange rate.

“The problem is that the parallel market, a largely retail, cash-based market, with small transaction sizes, and a large number of small sellers of FX, remains unsuited to meet wholesale FX demand in Africa’s largest economy,” Razia Khan, Standard Chartered Plc’s chief Africa economist, said in a Feb. 8 report.

The CBN foreign exchange reserves have dropped 33 percent to $27.8 billion between January 2014 and 2016 as official monthly inflows fell to less than a billion dollars last month.

The price of Brent crude, a global benchmark, has fallen from more than $100 a barrel in mid-2014 to a 13-year low of less than $30 a barrel last month.

Analysts say the CBN needs to return the 41 items banned from accessing dollars at the interbank FX markets, remove the peg so that the interbank FX market can determine the rate, raise interest rates to attract foreign portfolio investments and allow markets to operate fairly for credible price formation.

The Nigerian Government should not be emulating FX policies from dysfunctional countries such as Venezuela and Argentina (before the present Government of Mauricio Macri.), say analysts.

“Venezuela has three exchange rates that apply to different import categories, but the parallel market rate is 150 times higher than the tier-one FX rate. Needless to say that the Venezuelan economy has been dysfunctional – and even before the oil price collapsed,” Samir Gadio Head of Africa Strategy and FICC Research, at Standard Chartered Bank in response to questions.

The Central Bank of Nigeria needs to sell FX to banks in a transparent manner; analysts say and reduce the possibility of arbitrage.

“CBN discontinued the daily interbank Forex sales; also stopped the sale of dollars to the BDCs. To heighten the mixed signals, allowed citizens to deposit dollar cash into banks again. Most customers ignored the guideline, seeing it as a trap. Yields on the Nigerian bank Eurobonds have increased into Junk territory –evidence of an erosion of confidence as investors are fearing possible defaults,” said Bismarck Rewane, MD/CEO, Financial Derivatives Company Limited.

Nigeria’s FX trading turnover was about $300-$500million a day when the foreign exchange trading position was 1 percent of shareholders’ funds.

When the FX net open position of Nigerian banks was at 20 percent of shareholders’ funds in 2008, daily FX turnover in Nigeria was close to $1bn.

Today about $10 million is sold daily in the official market, aside from the Central Bank sales.

By comparison, South Africa’s spot FX market trades between $2bn and $4bn a day.

“The CBN can use the naira to support the naira,” said Onadele of FMDQ.

“They should offer FX futures that settle in naira in the interbank OTC market.”
"Curled from Business day" this morning.

 

[LequteMan]

@Efua Gbadamosi the currency is heading to N1000/$ according to some people.

What you posited seem to bear prospective adroitness to the current imbroglio but in the long run it won't solve the problem.

Why? We like to import. I don't blame us. It's easier to import goods to Lagos from Ghana than to Lagos from Kano. IF basic amenities in the country is available we won't have to venture as far as Sokoto to get something that's in our sokoto.

What I'm saying is govt needs to do its basic duties before things can start getting better.