Central Bank of Nigeria’s policy of curbing access to the interbank currency market for investors wanting to buy foreign currency and importers bringing in a wide range of goods from rice to Indian incense, shows that the apex bank is delaying its decision on a further naira devaluation, analysts say.
The reactions are coming just as CBN on Wednesday last week defended its action, saying the denial of foreign exchange access was to encourage local production, create jobs and cut down the undue pressure on the country’s almost depleted foreign reserves.
Analysts say the measures by the CBN policy will risk diverting dollar demand to the black market, worsening perceptions about economic policy and delaying a decision to devalue the naira in the wake of weak oil prices.
“We see this policy move as confirmation that FX supply remains extremely tight. But more worryingly, it suggests that the central bank remains reluctant to devalue the naira,” said Yvonne Mhango, sub-Saharan Africa economist at Renaissance Capital, as reported by Reuters.
Nigerian currency and bond markets have come under pressure since the oil price plunged last year. The central bank has spent $3.4 billion to prop up the naira since it fixed the exchange rate in February and tightened trading rules to curb speculation.
Tumbling oil prices have eroded Nigeria’s lure to foreign investors, but is likely to venture back if authorities will allow what some say is a much-needed naira devaluation.
Nigeria lost its top spot on the foreign investment destination list in Africa to Ethiopia.
“For foreign investors, the key is that there is a working foreign exchange market and that they are able to see how demand and supply interacts, “ Razia Khan, Regional Head of Research for Africa, Standard Chartered Bank, at the side lines of the World Economic Forum (WEF).
“A lot of foreign investors are waiting on the side lines, and you won’t see the big foreign portfolio flows coming in until we see that adjustment in the currency” she adds.
Capital imported into the country in Q1 2015 was $2.7 million the lowest value observed over the last two years. A sharp decline of $1.2 million or 31.58 percent was recorded year-on-year. On a quarterly basis, there was an acceleration of the downward trend observed since Q4 with a further drop of $1.8 million or 40.6 percent, according to the National Bureau of Statistics (NBS).
A recent report by Ernst & Young showed that Ethiopia was Africa’s eighth-largest recipient of foreign direct investment last year, up from 14th position in 2013.The number of projects in Ethiopia surged 88 percent, the most of all countries ranked, while those in Nigeria slumped 17 percent.
JP Morgan has warned it might remove Nigeria from its Government Bond Index (GBI-EM) if it does not restore liquidity to currency markets in a way that allows foreign investors tracking its benchmark to trade with minimal hurdles.
The naira, which was trading at 198.50 on the interbank market, sold for 220 against the dollar on the black market in Lagos, Nigeria’s commercial capital on Wednesday.
Foreign exchange reserves stood at 429.01 billion as at June 18, 2015, this shows a three percentage point difference from its previous month of $29.82 billion.
JOSEPHINE OKOJIE
