By Omodele Adigun
As the news hit the street penultimate week that there was an uptick in the foreign reserves, and the assurance given by the apex bank to watch over its growth, the question on the lips of many now is, ‘will the uptrend recalibrate the Naira value’?
Moving up the currency value “is basically a function of demand and supply”, says Mr. Rislanudeen Mohammed, the former acting Managing Director of Unity Bank Plc, in a chat with a national daily recently.
According to him, it can be done by market forces if the current foreign exchange (forex) intervention by the apex bank is sustained.
“The Central Bank’s intervention over the last several months has impacted positively in stabilizing the foreign exchange market and reducing the gap between parallel and black market rates from about N520 per dollar to the present rate of about N365,” he stated.
Recall that the apex bank recently said that country’s external reserves rose to $33 billion as at September 14, riding on the back of increased oil earnings.
Its Governor, Godwin Emefiele, speaking through his acting Director of Corporate Communications,Isaac Okorafor, said the bank would work hard to keep growing the reserves.
“The CBN requires the foreign reserves not only to intervene in the forex market, but also to maintain the stability of the local currency,” said Uche Uwaleke, the Head of Banking & Finance, Department of the Nasarawa University, Lafia.
It was in making large amounts of forex available that caused appreciation of the currency by over N85 in less than a week early this year. The natural value of the currency is still subject for discussion as some analysts believe it should be less than N300/$. But can this postulation cause the redenomination of the Naira?
Redenomination, according to Investopedia, is “the process whereby a country’s currency is recalibrated due to significant inflation and currency devaluation,” like the current fate suffered by the Naira.
Research has shown thatsome currencies have been redenominated a number of times in recent past.
For example, the Bulgarian lev was redenominated due to inflation arising at the end of the Second World War. After the redenomination, one “new” lev was equal to 100 “old” levs. The lev was redenominated three times in the 20th century.
A recent example of redenomination arose when the euro was introduced and the denomination on many European securities had to be changed to the euro.
Can Naira witness similar scenario?
So far, the apex bank has sold more than $9 billion to defend the currency since its interventions began last February. “At the time CBN began massive funding of the forex market, the naira had lost significant value, trading at over N500/$1 at the parallel market. Then rent seeking, speculation and hoarding ruled the forex market as individuals and banks made fortunes from huge unmerited profits to the detriment of the naira. The recession was also at its peak as government revenue dipped.
“The CBN intervention, from the improved government dollar earnings saw Naira recover to over N485/$ in early March 2017,” said an analyst.
On whether Naira can exchange for N200/$1 in foreseeable future, Mohammed said: It can be determined by market forces. Even the IMF is looking at N365 as the official rate. ” .
Now that the CBN has promised top-up to the reserves, Uwaleke x-rayed the essence of a strong reserves to the economy:
“The CBN requires the foreign reserves to manage inflation because high exchange rate also rubs off negatively on inflationary pressure. Reserves are also required to make the country appear credit worthy. And once your reserves drops below three months of import, then you are not credit worthy.
“A study by Tule et al (2015), which sought to determine an optimal forex reserves for Nigeria, established a minimum core foreign reserves level of $32 billion (being equivalent of 7.2 months of import). The International Monetary Fund (IMF) recommends three months of import cover as a minimum benchmark for reserves”.
Giving the background to the recent convergence of the all the exchange rates, Emefiele said:
“The CBN witnessed a significant decline in FX inflows and reserves from about $42.8 billion in January 2014 to about $23.7 billion in October 2016 before recovering to slightly over $30 billion today. In terms of inflows, the bank’s FX earnings have fallen from as high as $3.2 billion monthly sometime in 2013 to as low as $580 million per month at some point.
“Despite these outcomes, the demand for FX has risen significantly. For example, in 2005 when we had oil prices at about US$50 per barrel for an extended period of time, our monthly average import bill was $12.4 billion. In stark contrast, the average import bill in the first five months of 2017 was about $588.1 billion per month.The combined effects of the fall in oil prices and the capital flows reversals compelled several depreciations of the Dollar-Naira Exchange Rate. Indeed, the Naira depreciated from US$1/N155 in June 2014 to as high as over US$1/N500 in the parallel market around February 2017.”
Now should the reserves continue to rise, will CBN rest on this to ensure Naira recalibration or redenomination ?
If the answer is yes, the apex bank will have then succeeded in achieving its arduous mandate.