Many of my friends have been asking the reasons why naira has been appreciating against against the dollar for the past few days and I have decided to deal with that in a simplified language.
There is an economic explanation to that.
Imagine that during fuel scarcity, whereby there is an irregular supply of fuel to filling stations hence making motorists and generator users to rely on black market for supply of fuel.
The fuel pricing at the black market normally depends on the sellers’ perception of the scarcity and how much in need the buyer is.
The price per litre is not the same from one point to another.
Also, imagine that NNPC decides to punish the boarders of fuel by releasing a one week’s supply in one-fell swoop through its accredited filling stations at the normal price and mandates the fuel stations to sell fuel day and night.
Certainly, the price of fuel at the black market will tumble and crash until the black market sellers go out of business.
What if the fuel need of the country is 40 million litres per day and NNPC exhausts it stock after 7 days?
What would happen to the black market activities?
Everybody would once more resort to the black market and their prices would rise to the levels or even above what it was before NNPC flooded the market with fuel.
The smart black market players who decided to warehouse their “stock” and hibernated during the NNPC’s intervention would recover their costs of holding inventory and still make a kill.
If you replace:
Fuel with dollar or FX,
NNPC with the CBN,
Accredited Fuel Stations with Banks,
Customers with FX Users;
then the description would make sense to you.
The truth is that CBN has accumulated over $30billion in our external reserves owing to the increased crude oil production following the Acting President’s peace moves in the Niger Delta and the increased oil prices in the international oil market.
Therefore, CBN’s has an increased capacity to supply more FX to the market.
However, given that there is a backlog of over $7 billion FX required by various manufacturers, investors, parents with outstanding overseas students’ school fees, foreign bank loan repayments etc., it would be too optimistic to assume that CBN shall empty our reserve to satisfy all manner of FX users.
Banks would cause an increased demand of FX by granting manufacturers more naira loans to import raw materials.
Some manufacturers who scaled down capacity to produce or closed down due to their inability to get FX to import raw materials would start bidding for FX from CBN.
Recall that many banks reduced loans for working capital to the manufacturer ingredients industries due to poor loan utilization and performance. That would change.
The naira appreciated sharply against the dollar last few days simply because CBN surprisingly pumped over $500 million to the market through accredited banks to sell to FX users who had before now had gotten use to sourcing their FX needs from the black market.
The sharp reduction in the demand of FX by heavy users from the black market caused a panic offload of dollar cash and inflows at hand by the black market players.
That fall from ₦528/$ to ₦490/$ within 4 days (i.e. from 21/02/2017 to 24/02/2017) has wrecked some black market operators.
I’m sure some of them must have ended up in the hospital by now.
My friends should know that there is no way the black market price shall converge with the official market as there are traditional customers who would never buy from CBN even if it sells money N50 below the black market rate.
This group of people includes those that under invoice their imported goods to evade paying high custom duties; those tired of onerous documentation before accessing CBN FX; those that are repatriating illegal profits abroad; those involved in money laundering and persons that finance terrorism and other crimes.
The sustainability of the current exchange rates depends on the following :
1. Maintenance of peace in the Niger Delta to assure increased and sustained volume of crude oil for export.
2. Reduction in FX used to import arms and ammunition to fight insurgency
3. Reduction in FX used to import fuel if the refineries work as promised.
4. Reduction in importation of rice and other agricultural products that consume huge FX.
5. Increased confidence of foreign direct investors on the FG’s economic policies.
It must be noted that black market is an illegal channel of procuring FX but it rates became important or recognised when the legal source (i.e the CBN) was no longer assured and all, including the saints and the sinners resorted to the black market to source FX for both eligible and ineligible transactions.
My dear friends, I advise that watch you a while for now.
Don’t make any hasty long term projection using this flash of hope.
You must see a trend before you commit.
All I have written above is my personal perspective with limited information available to me. You are hereby advised to apply knowledge gathered herefrom with caution.
By Anayo Nwosu