Omodele Adigun
Although, the naira seems to have recovered at the black market last week with the Central Bank of Nigeria (CBN) making good its promise to restart gradual sales of the dollar to foreign investors with a view to clearing backlog demands, but the fear of worst recession in recent memory still lurks in the horizon.
Consequently, the local currency moved up, Thursday, to N435, from N465, per dollar on the unofficial market after it gained almost 10 per cent on Tuesday. It traded at 386.48 on the over-the-counter spot market.
According to Lukman Otunuga, a senior research analyst at FXTM, “it looks like the local currency is deriving strength from the Central Bank of Nigeria’s announcement in resuming the sales of foreign exchange to operators of the Bureau de Change (BDC) from September 7.”
The nation was hit by a severe shortage of dollars after CBN halted its weekly interbank foreign-currency sales in March. The outbreak of COVID-19 and consequent lockdown of major economies led to the slump in the price of crude oil, which accounts for more than 90 per cent of the nation’s foreign-exchange (forex) earnings, and consequently to the crash of the local currency.
The COVID-19 lockdown has almost wrecked the economy, which plunged its Gross Domestic Product (GDP) to negative territory of -6.1 per cent in the second quarter (Q2) of the year, according to the National Bureau of Statistics (NBS).
The NBS in its recent GDP report said that the economy contracted by 6.1 per cent in the Q2 of 2020 from a year earlier, with lockdowns in the nation’s two main cities and low oil prices taking their toll.
“The decline was largely attributable to significantly lower levels of both domestic and international economic activities during the quarter, which resulted from nationwide shutdown efforts aimed at containing the COVID-19 pandemic. Crude oil production was 1.81 million barrels a day in the second quarter, compared with 1.98 in the same 2019 period. A global oil price crash due to reduced demand from the pandemic saw the oil sector shrink by 6.63 per cent in the second quarter. The non-oil sector declined by 6.05 per cent, which the statistics said was the first decline in real non-oil GDP growth in nearly three years,” NBS said.
Even before the current travails of the naira, experts have blamed other factors, one of which is arbitrage, for its downward trend. Arbitrage, according to Webster’s Encyclopedic Dictionary, is the “nearly simultaneous purchase and sale of…foreign exchange (forex) in different markets in order to profit from price discrepancies”.
Mr Mustafa Chike-Obi, former managing director of the Assets Management Corporation of Nigeria (AMCON) and, currently, the executive vice chairman of Alpha African Advisory Limited, a financial advisory and fund raising firm said:
“Our currency has been appreciating in real terms over the last few years. The naira has been stronger than the dollar by about 40 per cent. So, that has to be addressed.
“It is technical and you need to understand it. If you go to America today and borrow $100, let’s say I pay two per cent for one year. At the end of the year, I owe the bank $102. If, however, I change that $100 to naira, I will get N36, 000. I use that N36, 000 to buy treasury bills in Nigeria at 10 per cent. At the end of the year I will have N39, 600. If I convert it back to dollars, I will have $110.
“So, it will pay back the $102 and I will keep $8. I have just made $8 profit for doing nothing right? That is an appreciation.
“But for me to get the same $102 value, what should the naira be? It has to go to a level where at the end of the year, it is still $102 so that I don’t make any profit from doing nothing. And that rate is N396 to a dollar. At the end of the year, the naira should go to N396 per $1 so as to remove that differential and stop that arbitrage. But instead of that, Nigeria continues to defend it to remain at N360 to the dollar.”
Before its resurgence last week, the apex bank had issued a circular in the penultimate week, saying that it would restart dollar sales to BDCs from September 7, after it suspended auctions in March due to the COVID-19 lockdown. This has sent jitters down the spine of speculators as funding for BDCs would provide more dollar liquidity to the parallel market to keep the naira stable; a development that has forced speculators to start offloading their stocks to bring down the rates.
The President of Association of Bureaux De Change Operators of Nigeria (ABCON), Aminu Gwadabe, explained that each BDC’s account would be funded with the naira equivalent of $10,000 sale from Friday, probably in preparation for Monday, September 7.
In a note to all BDCs, Gwadabe said that the apex bank had warned that any act of hoarding and speculation would be penalized, urging members to “trade only within allowable exchange rates with reliable documentation”. While the weekly sales volume is $10,000.0 per BDC, the CBN directed BDCs to buy at N384 and sell at a cap of N386.00/$1.00.
The naira’s improved performance at the forex markets could be linked to the improved accretion of the nation’s external reserves by 0.3 per cent week-on-week to $35.7 billion as at Friday, August 28, 2020.
According to Afrinvest West Africa, an investment and research firm, the external reserves climbed 0.3 per cent week-on-week to settle at $35.7 billion as at August 28. Also, Brent gained 4.3 per cent week-on-week to settle at $45.6/bbl., reflecting improved sentiment in the oil market.
However, activity level weakened by 48.6 per cent at the “Investors & Exporters Forex Window to settle at $163.2 million from the previous week’s $317.4 million.
However, commenting on the dollar sales to the BDCs, Rand Merchant Bank’s Johannesburg-based analysts, Neville Mandimika and Daniel Kavishe, wrote in a note that “while the resumption of foreign-currency sales is a boon for the (Nigerian) economy, which had been starved of dollar liquidity, the risk of round-tripping or arbitraging is high”.
But Gwadabe said that measures have been put in place to ensure that there is transparency. CBN will also monitor transactions.
“We know the disparity is huge and tempting to human beings. In such a situation, you cannot rule out deviations. We are going to emphasize compliance with laid-down regulations. Any breach that happens awaits heavy sanctions,” he said.
A Lagos-based analyst at Chapel Hill Denham, Omotola Abimbola, in a chat with a foreign online medium, noted that the increased supply of dollars won’t be enough to satisfy pent-up demand in the market, meaning the disparity between the official and black-market rates will remain.
“Even if the naira appreciates at the parallel market, there will still be a substantial difference between the rate the central bank is pricing the currency and the black market,” Abimbola said.
The signal started showing on Tuesday, September 1 2020, when the rate between the naira and the US dollar at the parallel market crashed to N440/ $1. The rate had closed at N465/US$1 the previous day.
The same thing happened to other hard currencies. For instance, the exchange rate between the naira and the British pound sterling stood at N595/₤1 on Tuesday morning, but later dropped to N580/ to the pound. European euro that was N545/€1 also fell to N542/€1
At the official market, the naira which traded at 381 per dollar at the weekend inched up to N380/$.
Forex sales resumption
The CBN, in a test trade to gauge the level of demand, sold around $50 million to foreign investors on the spot and 150-day forwards on Monday and Wednesday to companies and investors that have waited for five months to get their money out of the country, people with knowledge of the matter said. It said it would resume sales to retail currency operators from tomorrow.
“The resumption of sales should allow investors to exit the economy and could also attract more funds,” Oluwasegun Akinwale, a research officer at Nova Merchant Bank Ltd., in Lagos, said.
Gross Domestic Product (GDP)
Reacting to the 6.1 contraction in the GDP, a member of the Economic Advisory Council (ECA), Mr Bismarck Rewane, said that the report is a wake-up call for the country to start “doing some things differently.”
According to Rewane, who stated this during an interview with Channels Television, the decline was “surprising and concerning” but not “alarming at this point in time.”
He pointed out that the Federal Government’s stimulus plan for the economy was inadequate to cover for the shortfall recorded by the NBS.
Rewane added that the country was now faced with a quadrilemma, a situation in which a choice must be made between four undesirable options.
“The first variable we are looking at is recession, negative growth; the second variable is high inflation, which is almost 13 per cent.
“The third variable is high unemployment; even though the unemployment numbers are at 28 per cent, we think that it is much more than that. And finally, we have weaknesses in currency.
“So, we are having external weaknesses and vulnerabilities, slow growth, high unemployment, and, more than anything else, contraction in economic activity.
“Now, we are going to move away from the monetary policy complement that we have, stimulate the economy with greater catalyst, and do some things differently,” he said.
Is Nigeria heading for a technical recession?
With the NBS report, the question analysts are asking is: “Is Nigeria heading for a technical recession?”
Otunuga stated: “Nigeria’s monetary and fiscal policymakers face enormous challenges as the country confronts a looming technical recession just three years after the last downturn in 2017.
“The COVID-19 pandemic circumstances have combined with low oil demand and prices to brew up a perfect storm. Buffeted by the strong headwinds, Nigeria’s second-quarter GDP shrank by 6.1 per cent, the biggest drop since 2004. Government revenues, which rely on oil sales shrank along with the demand for crude oil. Besides that, low oil prices may pressure foreign exchange earnings and reserves, as 90 per cent of Nigeria’s currency earnings stem from sales of crude oil. The country remains exposed to external risks. The second-quarter contraction highlights Nigeria’s exposure to external risks around the oil markets, redoubling the urgency behind the state’s diversification efforts. The World Bank expects Nigeria to face the worst economic recession since the 1980s because of the collapse in oil prices. It projects the economy to shrink by 3.2 per cent for the full-year 2020 on the condition that Nigeria contains COVID-19 by the third quarter. If not, the contraction will be worse, according to the World Bank.
“The International Monetary Fund (IMF) is more pessimistic about Nigeria’s economic outlook. It sees GDP shrinking by 5.4 per cent this year, the biggest decrease in 40 years. Goldman Sachs puts the full-year GDP contraction at a five per cent GDP contraction, closer to the IMF’s than to the World Bank. The Coronavirus lockdown weighed on the economy, as domestic and international activity caved in at the same time.”
However, he recommended that the domestic risks must not be overlooked.
What role will OPEC play?
Adding to the macro-economic challenges around COVID-19, Nigeria will have to reduce oil production in August and September to comply fully with OPEC’s supply cuts. Coming on top of lower oil prices, reduced production means decreased government revenues and foreign exchange earnings. An accompanying knock-on effect on GDP is likely.
Nigeria is likely heading for a technical recession. If the country contains COVID-19 and pro-actively prepares for more localised outbreaks, the World Bank believes this may support GDP and limit the economic damages. Over the last three months, COVID-19 cases have risen to 52,227 cases with 38,945 recoveries. The number of deaths stands at 1002, at the time of writing. When compared to South Africa’s 607,045 cases, Nigeria is in a better public health position. If the authorities limit the spread of Coronavirus and continue to manage the situation effectively, Nigeria’s economy has better chances of recovering in line with a global recovery in the medium term, Otunaga said.
Gold to the rescue
Otunuga also believes that gold mining can support Nigeria’s economy after the country refined its own reserve gold bar and paid N268 million for the 12.5 kg bar to start a central bank stock.
“Stratospheric Gold prices and spiritless oil prices would seem to indicate that the state’s investment in gold mining is a timely and positive one. Amid the COVID-19 pandemic, gold remains a market-moving and safe-haven asset after spot prices hit all-time highs above $1981 in July. The precious metal appreciated almost 30 per cent for the year-to-date and is roughly $50 away from $2,000 at the time of writing. For the first time, Nigeria has refined its own reserve gold bar and paid N268 million for the 12.5 kg bar to start a central bank stock, shining a bright spot amid all the economic headwinds.
“The newly-regulated gold mining sector is expected to create 250,000 new jobs and provide the Federal Government with an additional estimated annual revenue of $150 million in taxes, $25 million in royalties and $500 million in foreign exchange reserves. These positive developments in the gold mining and central bank reserve initiatives may help to improve investor sentiment against the background of COVID-19, low oil prices and the expectation that Nigeria’s economy could contract by anything from three to six per cent this year. We must also factor in another hit to export earnings caused by the deeper cuts imposed by OPEC on Nigeria and Iraq due to overproduction,” he said.
Otunuga suggested that a well-managed diversification into precious metals mining and building a national gold stock can support the central bank’s foreign exchange reserves long term, as well as boost other wider types of gold trading like derivative investments and mining stocks, adding, however, that care must be taken to protect the new sector’s reputation and government regulations would need to be seen as enforceable for long-term credibility.