President of the Nigerian Economic Society, Prof Adeola Adenikinju has flayed the current low value of the naira, insisting that the exchange rate market is not driven by fundamentals.
This is as Nigeria’s currency is on the cusp hitting a record-low of N1,500 against the US dollar in the face of a severe dollar shortage in the parallel market.
Prof. Adenikinju, also a member of the Monetary Policy Committee of the Central Bank of Nigeria (CBN), said the current scarcity of dollars that is fuelling the depreciation of the naira is largely as a result of hoarding by those who are still watching to see what policy direction the CBN plan to tow.
The professor of Economics who spoke during a visit to the LEADERSHIP Group head office in Abuja, said many people have lost confidence in the system due to lack of clarity about the promise by the apex bank to sustain the flow of foreign exchange in the country to meet demands.
“A lot of what is happening now in the market is not driven by fundamentals, it is also driven by people just lacking faith in the system.”
According to him, a lot of people are thinking, “I don’t trust this system and I don’t understand what the CBN is doing so I am going to keep my money in dollars.”
He said “So people are just buying dollars and keeping and those who have dollars are not willing to bring it to the market.”
Prof Adenikinju however said that once there is a clear guidance as to where things are going there will be a difference.
He noted that initially, there were some pronouncements that the CBN governor made when he first came in, about what he was going to do and the market started narrowing, because he had said they were paying back some of the legacy debts.
Recall that the federal government had promised to get dollars from Afreximbank, Saudi Arabia among others, into the system.
“If all these had happened accordingly, it would have sent the message that the market is able to meet the demand and people would feel there is no need to hoard. But when he made those promises and nothing happened and no one was providing information as to why the monies had not come in, people concluded that something was wrong and everybody went back to hoarding. So it’s the lack of confidence in the system that has caused this crisis,” he said.
He said there has to be a clear cut policy to sustain liquidity in the market. “In this kind of economy you need to build that confidence, that trust, and inspire people. To regain confidence, there must be a clear flow of communication and there must be analytics to show people what you are doing and it’s not just rhetoric.
Meanwhile, the exchange rate fell to a fresh low of N1,460 per dollar at the parallel market on Tuesday morning with traders expecting further weakness in the coming days as dollar shortages worsen.
The naira also fell to an all-time low of N1,348.63 per dollar at the Nigerian Autonomous Foreign Exchange Market (NAFEM) on Monday, a 33.87 percent decline compared to the N891.90 quoted on Friday, according to data from the FMDQ.
The exchange rate had hit an intraday high of N1,414.94 per dollar on the day as the daily FX market turnover dropped by 36.68 percent to $64.29 trillion on Monday from $100.97 million recorded on Friday.
Speaking on whether the plan to float the exchange rate was the right one, Adenikinju said economists were worried about the dual exchange rate window that the country operated in the last administration and the negative impact it had on the economy.
“In the benefit of hindsight, when Emefiele was there, a lot of economists and even commenters were worried that the country had different exchange rates for the naira. We had one at N400/$ and another at N700/$ and those with connections will get it at N400, then go to the market and sell at N700, We were all worried. We shouldn’t have that kind of multiple dual exchange rate because it’s not good for investment, or planning. It introduces some kind of shady deals with people just trying to get rents or arbitrage. So most economists were in agreement that the rates needed to be unified.”
Investigations revealed that there is a significant surge in the demand for dollars due to legitimate needs, creating a challenging environment for importers and travellers who heavily depend on the black market.
Importers are finding it increasingly difficult to secure the necessary funds from the official FX market and black market.
Legitimate needs driving the demand include Form A applications for Business Travel Allowance (BTA), Personal Travel Allowance (PTA), school fees, and medical fees. Small and Medium Enterprises (SMEs) are also grappling with the scarcity, as highlighted by the use of Form Q.
“The problem is that dollars are scarce in the market. People are not bringing dollars and demand is so high that is why the price is going up,” a street trader told BusinessDay on Tuesday morning.
