Naira defence: No surrender while retreating

Emefiele has been offloading billions of dollars from the CBN coffer in defence of the naira—and of something else dear to him

By Elijah Olusegun

WITH $155 billion plonked into circulation to defend the naira in the last seven years—and $41 billion still sitting in the CBN vault—Nigeria foreign reserves trajectory has confounded many. It could even have struck some as inexhaustible. More so when it was also able to cough up over N4 trillion the apex bank has spent so far in other economic interventions.

But records show the cupboard was almost bare in 2015. Nigeria’s dollar coffer dwindled to $29.6 billion December that year, the first of President Muhammadu Buhari’s administration. It worsened a year later—at about $23 billion as crude oil dipped below $30 per barrel.

Critics, including analysts, PDP, and naysayers, called on the CBN to unhinge the naira, among other steps. After all, the $2.9 billion and $11.7 billion the bank poured into the system in 2015 and 2016 respectively couldn’t shield the naira. Although Marcel Okeke, an economist and financial analyst, told National Standard the CBN was only doing its job.

And the curb, another effort CBN Gov. Godwin Emefiele put on forex outflow (import), appeared useless in stemming the dollar crunch that time.

Olisa Metuh, then PDP national publicity secretary, described the move as a crude control already proven ineffective in preventing capital flight.

“They have instead increased the demand for foreign exchange, putting greater pressure on the naira and achieving the exact opposite of what the government in its naivety believed would happen,” he said at a press conference in Abuja on Dec 29, 2015. A dollar could buy about N198 then.

As Emefiele floundered through the period, the national currency eventually found its mojo again. By 2018, the reserves figure ballooned to $43.23 billion. In 17 months, it racked up $19 billion, as of January 2018—an 86-percent growth.

By May that year, at over $47 billion, it emerged the biggest reserves on the continent, ahead of South Africa’s ($43.1 billion) and two others’. A dollar exchange for about N360 by then. That was about 100 percent depreciation. And the CBN had burned through $15.8 billion and $36.6 billion, respectively in 2017 and 2018, to defend the currency.

Still excited about the costly liquidity, Edward Adamu, CBN’s deputy governor, corporate services, at a seminar in Uyo, Akwa Ibom, said the bank targeted $50 billion in reserves before the end of that year. The forecast failed, though.

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But that rally continued till 2019, hitting $45 billion in June.

According to analysts, an upsurge in dollar inflow, and the bump in oil price moves were the reason for the growth—not entirely the CBN defence of the naira. The bank offered foreign investors interest rates as high as 17 percent per annum for risk-free treasury bills and Open Market Operation bills, in exchange for hard currency, Nairametrics explained while analyzing the CBN approach.

It was also a good thing oil prices peaked at $70.98 per barrel July, and traded slightly above $70 till October that year before retracing to $40 in December. To keep the exchange at N365.7 to a dollar, the CBN offered at least $53 billion.

All the efforts were too expensive to sustain. By December 2019, the bust was loud as the CBN pared down the OMO interest rate. The Covid-19 pandemic then hit, and compounded the problem. By then, the foreign reserves had $38 billion left, after the CBN dumped in over $34 billion again intervening in a new cycle of dollar crisis. The greenback sold for about N409 then.

As usual, the call came harsher, asking Emefiele to let the naira drift where it might, as the market forces of demand and supply pushed. But the CBN governor would have none of that.

He wasn’t alone.

Marcel said those pushing for that approach are calling for bigger economic calamities. “If they do that, the naira will die completely,” he said. “The strength of any currency is a function of production and productivity. What are we producing? What are we exporting?”

He noted that Nigeria’s so-called diversified economy that earns not enough forex from export but largely depends on oil forex cannot be left at the mercies of market forces. And that is why the CBN has to keep defending the naira.

“If we allow the naira to stand on its own now, a dollar will soon sell for N1000,” he said.
Between 2019 and 2021, the naira fell from N409 to N414, officially, dipping as low as N470 in 2020. That was over 209 percent loss in seven years—the more reason the CBN had to defend some more. And the reserves offered $27.8 billion that year, leaving $35.4 billion in the coffer. The year 2021 has the least of the forex interventions: $4.7 billion. As it happened, it’s been another year of surprise rebound.

The reserves currently boasts $41.3 billion thanks to IMF inflows and Eurobond proceeds, said Emefiele, among other economic recovery moves, post-covid-19. Again, the surge in energy prices added to the boost. According to the World Bank, global oil demand rose in the third quarter, which was 3 percent below the pre-pandemic peak. Oil traded above $70 per barrel as of November. And all things been equal, the CBN, looking through its rose-colored spectacles, has foreseen, by mid-2022, a moderate growth: $42 billion.

“This is due to the sustained increase in crude oil price, the impact of Eurobond Issuance, and the stable exchange rate condition,” Emefiele said at a France-Nigeria Security and Economic Summit, in Paris, France in November.

He’s honest to not attribute the bounces in the reserves and the level of naira stability to his defence with dollars or something different in Nigeria’s production sector. But it will be hard to divorce him from clinging to that tested helpmate for now, as Marcel also hinted. In fact, the CBN governor is not only getting encouragement from the bursts of growth the economy is witnessing; some groups are geeing him up to dump more dollars in the system.

The Lagos Chamber of Commerce and Industry is one big advocate. Its President Toki Mabogunje said in July there was need for CBN to double down on its intervention, and roll out more friendly supply-side policies to boost liquidity in the forex market.

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If not for anything else, the brevity of his remaining days17-months at the CBN will make Emefiele and the CBN stick with what they have been doing. He won’t cringe under the pressure to go the way less travelled, and expose the naira to the forces of demand and supply.

For him, it is a call to risk all at the tail end of a 10-year run as CBN helmsman. And he can’t wrap his head around a N1000/dollar forex as a legacy.

He’d rather make a hole in the reserves defending the naira, and hope oil prices bounce.