The curious rebound of the Naira

The last week of July 2015 was noteworthy in Nigeria for the curious rebound of the Naira against the Dollar. In a strange chain of events, since the removal of some items from the foreign exchange market sparked off an alarming slide of the Naira in the parallel market, the Naira appreciated from N242/$ to N220/$ within the week.

The controversial decision by the Central Bank of Nigeria (CBN) on June 23, 2015, which was aimed at resuscitating local manufacturing, expanding job creation and conserving the weakening foreign reserves, had engendered a robust debate of its pertinence in the Country.

While aggrieved manufacturers and importers were engaging the CBN on modalities to consummate valid trade transactions initiated before the policy change, the banks were grappling with the growing volumes of unmet foreign currency obligations, due to the dearth of foreign exchange. The scathing “Toothpick Alert” article of July 4, 2015 by The Economist Magazine, expectedly drew the ire of many touchy Nigerians, though many others remained convinced that the eggheads at the CBN were misguided.

The immediate consequence was that players, whose imports were hitherto provided for in the foreign exchange market were forced to vie for funds in the parallel market, leading to the slide of the Naira. Speculators made brisk business out of the uncertainty as many scrambled to procure the almighty Dollar, and sold at a good margin in a couple of days. Many others stocked up on the Dollar in anticipation of a sustained slide, hoping to make a killing when the Naira perhaps slides to N350/$. The Mallams, the ubiquitous black market operators, were not left out as they thrived with the increased transaction volumes and margins.

However, by Thursday July 30, the Naira began its unlikely rebound, trading for as low as N236/$ by the close of business. The reaction was two pronged; while some anticipated a further appreciation of the Naira and quickly began disposing of their stock of Dollars, others felt it was a flash that would reverse by the next day. My Mallam friend; Zubairu had advised, “Oga, if you have any Dollar, please sell now as e fit reach N150/$ by next week.” Far-fetched, I reasoned as I couldn’t place my hands on the dynamics that could drive the recovery of the Naira to N150/$ without a corresponding reversal in the Country’s negative balance of trade.

By Friday, the news of the rejection of Dollar deposits into domiciliary accounts by banks was everywhere and the real panic had set in. It was reported that banks were awash with Dollars and had taken the drastic measure when the CBN declined their request to help wire the funds overseas. Those who had no business holding the currency, became increasingly desperate to offload, leading to a further appreciation of the Naira to about N220/$ by the close of business.

Events in the coming week will be very interesting, as CBN’s Biometric Verification Number (BVN) requirement for Bureau De Change (BDC) operators kicks off. Some are predicting that the Naira will appreciate further with the resultant transparency in the market, which is expected to curb the speculative demand supposedly driving the devaluation in the parallel market.

We will watch and see which way the pendulum swings, as Nigeria’s dynamic economy have in many instances in the past defied economic fundamentals.