By EMEKA OKOROANYANWU
NIGERIA’S currency, the Naira received its worst bashing last week at both the parallel and official markets, thus signalling more pains for Nigerians. At the Nigerian parallel market, the naira fell to its lowest level since the start of the new foreign exchange regime, trading at N363 to US$1 and N485 to one British pound. The naira, which began trading at around N283 to the dollar at the interbank market on Thursday, depreciated to 284/$1 to become the third worst performing currency in the world for 2016. The Euro traded above N390 in Lagos and under N380 in the nation’s capital, Abuja. Since 2016, the naira has lost 29.61 percent of its value on the official market, following the decision of the Central Bank of Nigeria (CBN) to allow for a floating foreign exchange regime.
Analysts had predicted a rough time for the nation’s currency following the poor run of the economy in the last one year. Central Bank of Nigeria (CBN) had last month unfurled what it termed flexible foreign exchange rate policy to save the naira while at the same time assuaging foreign investors who were complaining that the naira was overvalued. The policy, according to the apex bank, would usher in a period of hope that may stabilise the naira and smoothen out the spot forex demand with new forex forwards and future products.
CBN Governor, Godwin Emefiele in the new forex guidelines, had revealed two sets of operational rules. The former window for critical transactions rate were discarded for CBN intervention in the interbank market in which new primary dealers would transact with the apex bank on large trade volumes of US$10 million minimum for spot forex. By this policy, CBN would participate actively in the interbank market and through what it termed secondary market intervention sales (SMIS).
Thus, as the largest single forex contributor in the market, CBN’s intervention was expected to usher in a period of relative calm in the already volatile forex market.
Emefiele who lamented that the CBN’s monthly earnings had fallen bellow US$1.0 billion from as much as US$3.2 billion in 2013 before the fall in the price of oil said the new policy would boost supply of foreign exchange to the market and reduce pressure on the naira.
He made it clear that even though the rate would float freely, CBN may from time to time intervene as the need arises.
However, within one week of the introduction of the new foreign exchange policy by the CBN, the naira predictably slumped to N282.50 to one United States dollar. Before the introduction of the policy, the naira had been pegged at N197 to one US dollar for over sixteen months even though it had been trading at over N320 per dollar for months on the black market, now it sat at N363 per dollar in that segment of the market last Friday.
For the first one week of the new forex regime, the Nigerian currency gained some relative stability. Activities in the market early part of the first week were characterised by cautious trading as end users of foreign exchange adopted a wait-and-see attitude. This gave rise to early euphoria by some optimists who felt that the market had gained stability in response to the new policy. But by middle of the week, that early optimism gave way to trepidation as many end users had entered the fray. Dealers complained that demand was beginning to outstrip supply, as the naira recorded some losses, closing N284/ USD1.00, down from the N281.85 it closed the previous week.
What dampened the market was the inability of expected suppliers of forex, mostly oil companies to push in enough currency for purchase by ever thirsty buyers.This forced the CBN to intervene with USD4.02 for both the spot and the futures market in the first two days of trading. The CBN pushed USD532 million into the spot market while the balance went to the futures segment.
The poor performance of the naira against other international currencies is a bad news for the economy, as prices of commodities will expectedly take an upswing, thus compounding the already strangulating situation in the country. The worst hit sector of the economy that will be affected is the manufacturing segment, already on its knees as a result of debilitating factors characterised by poor national earnings and high cost of foreign exchange.
CBN report on the state of the economy last week had revealed that the Purchasing Manager Index (PMI) for June showed a speedy decline in economic activities in the country. For example, in the manufacturing sector, production level, new orders, employment level and raw material inventories decelerated at a very fast rate. The report also indicated that the non-manufacturing sector did not fare better as business activity, new orders and employment level slowed down at a faster rate while raw materials inventories declined at a slower rate.
According to the apex bank, the manufacturing PMI dropped to 41.9 index points in June 2016, as against 45.8 points in the preceding month. The composite PMI for the non-manufacturing sector recorded decline for six consecutive months as the index dropped to 42.3 points, showing a faster decline than in the previous month of May. The CBN therefore pronounced that the economy had slumped into recession.