Last week the Central Bank of Nigeria (CBN) released a list of 40 items later raised to 41 items that were proscribed from accessing the domestic FX market i.e. the interbank market. My first reaction going through the list was the weird items: Indian incense, head pans and wheel barrows. Furthermore, some items on the list share similarity to another list – the import prohibition list on the Nigeria Customs Service website. Put simply, the CBN was outlawing access to items which never should have been provided access anyway as they were banned – cement, poultry, palm oil, soaps and detergent and a few others. The monetary authorities also deemed it fit to ban Nigerians from using locally sourced FX to buy foreign Eurobonds.
Unsurprisingly, the now ejected demand moved to the parallel market pushing the rate on the segment from roughly N221/$ to N225-230/$ with the implied premiums near previous crisis peaks. However the interbank USDNGN rate remains stuck at the N197-199/$ range, it has held up since February end. However, speaking to bankers the sense you get is that this is an illusion with the FBN Holdings CEO Bisi Onasanya letting rip into the CBN last week Friday.
The CBN argument is funny, it claims the aim of the policy is to stimulate local production of such goods. However, if the apex bank truly wanted that then the direct way to stimulate local production would be to devalue the naira so badly that local alternatives look cheaper than foreign ones.
As Alan Greenspan once noted, “Having endeavored to forecast exchange rates for more than half a century, I have understandably developed significant humility about my ability in this area”. Most exchange rate forecasts tend to deviate in magnitude of the future change in a currency but hardly in direction. Overtime, countries experiencing a current account deficit, huge debt burden or deteriorating economic fundamentals (growth and inflation) see the value of the exchange rate depreciate. The over 40% plunge in the price of the key source of export proceeds which supplies 90% of inflows to Nigeria’s foreign reserves has seen markets lose confidence in the old naira peg rate. Unlike some other market expectations which may be out of sync, current uncertainty stems from lack of certainty over the current undeclared peg of N197-199/$.
The movement in oil price is non-transitory; nothing can be gained by an inflexible position on a currency whose value is driven by shifting oil price dynamics. Furthermore with the JP Morgan index status review now extended to end of 2015, the apex bank should be putting the framework in place to resume trading. A key risk on the NGN was the elections which are now past. The CBN does not have anything to be ashamed of anymore after two devaluations. Bite the devaluation bullet and re-open the market!