1. Nigeria floats its currency.

My response: “Nigeria’s floating of its currency, while progressive, will cause severe perturbations in the economy – and a stable state may not come as most experts have predicted” – Ndubuisi Ekekwe, June 2023

2. JP Morgan projects that Naira will settle at N600/$ post-float.

My response: ‘“My perspective: I think JP Morgan may need to review. Whether you float, swim or fly Naira, Naira can only survive if the economy is productive with capacity to produce things (digital, physical, service, etc) to reposition the nation’s balance of payment and trade.”’ – Ndubuisi Ekekwe, June 2023

Can these people pay attention to village boys and girls as they work to fix Naira which has hit an excess of N1400/$? We were lone dissenters to the broad general positive consensus on Naira floating. Of course, I would be happier if We The People here were wrong! Do they read us? Village boys and girls do have things to contribute!

1. Nigeria floats its currency.
My response: “Nigeria’s floating of its currency, while progressive, will cause severe perturbations in the economy – and a stable state may not come as most experts have predicted” – Ndubuisi Ekekwe, June 2023 https://t.co/fwEmi2DQhf

2. JP Morgan… pic.twitter.com/vkQNI4gQ0D

— Ndubuisi Ekekwe (@ndekekwe) January 31, 2024

Comment on Feed:

Comment 1: Our country is in need of a major reset, if we can’t earn USD to sustain our dependence on the consumption of foreign goods and services and we can’t switch to the consumption of locally available goods and services, let the naira remain floating to help us with the difficult but necessary reset.

In my view, no policy has exposed the failure of the Nigerian elites more than the policy on the floating of the naira. We need to start the unavoidable shift to the local transformation of locally available resources to create the goods and services for local consumption and export. We need to start growing cotton and start converting same to the textile that we need without any excuses. We need to sustain the refining of our crude oil to start producing the petrol and diesel that we use.

If we can’t grow wheat, we need to start baking and consuming Cassava bread.
The Nigerian elites must take the lead in the redesign of the Nigerian economy.
Let the naira remain floating to help us with making that critical but necessary mindset switch.

According to Newton’s law of inertia, the condition that we have been accustomed to for decades will not change without a force, that force is the floating of the naira.
Let the naira keep floating.

My Response: The irony is that you could have done all those without the float!  We need to understand that even China does not float the Yuan for an opposite reason (if it floats, the currency will become stronger which it does not want since it is export-dependent). What China does is to artificially track the US dollars and with the funds it has, and it achieves that. 

Unless you are fully advanced with “international currencies” like the USD, UK, Euro, Yen, etc, OR you generate so much foreign reserves like rubles (Russia before war) floating is very risky. In Saudi Arabia, for decades, they did not bother: they pegged their currency to USD dollar, no float.

Floating had limited values for most countries. The biggest risk in such economies is not the variation between official and black market rates, but the instability in the exchange rate. I earned a doctoral degree in this space with focus on international markets and global currency as a banker. I played a core role pushing the African Union out of a single currency a decade ago in many lead papers https://base.afrique-gouvernance.net/docs/volume_21.pdf . If you look at the data, what Nigeria did was not smart on this floating.

History was made yesterday in Nigeria: “In a surprising turn of events on Tuesday, the foreign exchange market experienced an unusual occurrence as the naira reached N1,482/$1 on the Nigerian Autonomous Foreign Exchange Market (NAFEM). This marked a significant increase compared to the parallel market rate, which remained anchored at N1,460/$1, maintaining the rate from the previous day.”

Yes, the official rate rose above the black market rate. So, if the official rate is ahead of the black market, we can all agree that some asymmetric endogenous factors are deeply at play here.  Simply, the official demand was so high that the supply side crashed, moving price to a new equilibrium point in the supply-demand curve of Naira/USD.  I think a state of emergency is due right now to save Naira.

(I suspect that Dangote Refinery is mopping all available USD to import crude oil since it cannot rely on Nigeria now, creating more pressure on the Naira. That is a reverse osmosis which could be sustained since you cannot shut down the refinery now that it is firing. The firm possibly went to the official market to buy at all costs.)

If indeed it is true that Dangote Refinery is sourcing crude oil from outside Nigeria,  it would be a major own-goal for Nigeria: “Dangote Refinery, Africa’s largest refinery, is set to begin crude oil import from the United States in February…According to reports from Bloomberg, Trafigura Group has brokered a deal to supply Dangote Refinery with 2 million barrels of WTI Midland crude expected to be delivered by the end of next month, marking the first instance of the refinery purchasing non-Nigerian crude.”

Good People, it may be time for the president to address the nation on what is going on because basic economics does not work in Nigeria anymore. As that happens, I commend the central bank for the new policy on foreign currency exposure by banks (see directive). That call is necessary because USD, Euro and GBP are making banks have great parties, even as those same currencies could destroy them if there is a flip. So, making sure they stay within 20% of net open position (NOP) is a nice call by the apex bank.

History was made yesterday in Nigeria: “In a surprising turn of events on Tuesday, the foreign exchange market experienced an unusual occurrence as the naira reached N1,482/$1 on the Nigerian Autonomous Foreign Exchange Market (NAFEM). This marked a significant increase compared… pic.twitter.com/8h2M6eRWoN

— Ndubuisi Ekekwe (@ndekekwe) January 31, 2024

In a surprising turn of events on Tuesday, the foreign exchange market experienced an unusual occurrence as the naira reached N1,482/$1 on the Nigerian Autonomous Foreign Exchange Market (NAFEM). 

This marked a significant increase compared to the parallel market rate, which remained anchored at N1,460/$1, maintaining the rate from the previous day.

The official NAFEM window, which closed at N1,482.57, reflected an N133.95 loss or a 9.94 percent decline from the previous rate of N1,348.62. This shift in the exchange rates has caught the attention of market participants, prompting speculation about the central bank’s potential move towards the convergence of the naira.

Data from the Financial Markets Dealers Quotations (FMDQ) website revealed a notable increase in daily turnover, reaching $72.33 million on Tuesday, a 12.50 percent rise from the $64.29 million recorded on Monday. The spot rates recorded for the day ranged from the highest at N1,531/$1 to the lowest at N789/$1, indicating increased volatility in the market.

The drastic fall in the exchange numbers in NAFEM indicates a possible devaluation for the naira’s convergence by the CBN especially considering that the official rate has been dangling around N890 per dollar.

Mrs. Hakama Sidi-Ali, the Acting Director of the CBN’s Corporate Communications Department, said on Monday that the apex bank has implemented reforms to streamline and unify multiple exchange rates, foster transparency, and reduce arbitrage opportunities.

The Lagos-based FMDQ said in a notice to financial market operators that the change to the pricing methodology “aims to address recent fluctuations and challenges encountered in the Nigerian Foreign Exchange.” The measures will ensure “rates accurately reflect market conditions while upholding price formation and transparency,” it said.

The central bank has for long been pointing accusing fingers at speculators, whom it believes their report of inaccurate figures is impacting the naira’s performance in the FX market.  

“The NAFEX [NAFEM] fixing and closing rates were weighed down by trades going through at off-market levels’” Samir Gadio, head of Africa strategy at Standard Chartered Plc told Bloomberg. “What is clear at this point is that these off-market trades are not factored in anymore, hence the jump in NAFEX.”

In a circular published Monday, the CBN said it had become aware of traders reporting “inaccurate and misleading information,” including under-reporting of transaction pricing, which affected the exchange rate.

“Deliberate attempts to create price distortions by reporting false transaction details amounts to market manipulation which will not be tolerated and will henceforth face sanctions,” the central bank said. It added that it is “committed to a well-functioning and transparent market” conducted on a willing buyer, willing seller basis, with prices quoted and displayed transparently.

While the CBN has not commented on the strategy shift, analysts have faulted the idea that speculators are responsible for the naira free.

“Blaming speculators for falling Naira is like Arsenal fans blaming Man City for Arsenal not winning the league last season,” Kalu Aja, a financial analyst humorously said.

Analysts say the answer to Nigeria’s FX crisis is tied to adequate liquidity of the dollar, to fill the gaps orchestrated by the scarcity – such as Nigeria’s inability to fulfill its financial obligations involving matured FX forwards with banks and repatriation of trapped revenue of multinational companies operating in Nigeria.

The central bank said it recently released $500 million, targeting the backlog of verified foreign exchange transactions spanning various sectors. This latest action comes on the heels of an earlier payment of approximately $2.0 billion to settle outstanding commitments in crucial sectors such as manufacturing, aviation, and petroleum. This includes payment of $61.64 million to members of IATA, who have more than $700 million in earnings trapped in the country.

.@cenbank has released $64.44m in blocked #airline funds??however $700m remains with #Nigeria’s commercial banks ?

The devaluation of the Nigerian Naira against the US dollar is a concern. #Airlines shouldn't be penalized by the lower exchange rate. https://t.co/GkkqzOOnvm pic.twitter.com/OSbiNOIeoO

— IATA (@IATA) January 30, 2024

While the depreciation has been “very significant,” dollar supply from the central bank will need to improve for the naira to stabilize or even strengthen, Gadio said. Currency inflows from portfolio investors would follow, further supporting the naira, once short-term interest rates rise significantly, he added.

Investors have reportedly expressed doubt about Nigeria’s foreign reserve, said by the CBN to be around $33 billion. They argue that if the amount of the foreign reserve is correct, the nation will not be struggling to repatriate funds to multinational companies. 

The CBN said last year that it’s looking to secure $10 billion to clear Nigeria’s FX backlogs, which the Minister of Finance Wale Edun has fingered as a major contributor to the FX crisis.

The new CBN directive on foreign currency exposure; download here.