Notwithstanding the rattle by the newest variant of COVID-19, Omicron, which has raised fresh uncertainty, data and economists see near-term stability in the foreign exchange market.
Rising from the panic that greeted the ‘freezing’ of the bureau de change (BDCs), the black market rate has been stable in recent weeks, trading around 550/$ band in the past few days.
Hoarding and panic buying had seized the market by the jugular, raising the level of illiquidity. As the crisis continued, the value of naira against benchmark currencies plummeted with the dollar hitting new highs daily and approaching close to N600/$.
The Central Bank of Nigeria (CBN) and some financial analysts described the panic as transitory, pointing out that the currency traders would run out of business when the new retail transaction model, which makes the deposit money banks (DMBs) the sole sale outlets, was perfected.
The CBN had also insisted that the black market rates could not be taken for the true price of the local currency, as the segment was not recognised and extremely speculative. The BDC operators were ousted on allegations that they were involved in extreme market manipulation and money laundering.
Findings have shown that the panic has eased, at least in the meantime. Traders have also confirmed that liquidity has improved. Data have also suggested that the monetary authority has better headroom to manage any shock.
For instance, foreign exchange reserves have witnessed a modest accretion in recent months. Earlier, the figures tumbled with the gross hitting $33 billion in July before it started a gradual rebound.
The reserves have maintained a stable rise since August, closing yesterday at $41.8 billion. The reserves have flattened around $41 billion and 41.9 billion in the past five weeks.
Rising reserves, David Adonri, an investment expert, told The Guardian yesterday, suggests near-term stability in the FX market and more headroom to meet any surge in import bills.
“The market has recovered from the shock that follows the restriction of BDCs. The price seems to have attained equilibrium at N550/$. If you also look at the foreign exchange reserve, it has been stable, which means the monetary policy has more room to play in its intervention in the market,” Adonri said.
No doubt, the market is not out of the woods. The new COVID-19 variant has merely raised fresh tension, putting more pressure on the international oil and stock markets.
But Adonri said the global economy seems to have mastered the art of fighting back at COVID-19. He said the market has demonstrated it can absorb the shock and could put the panic behind it in the coming weeks.
But another expert and retired investment banker, Victor Ogiemwonyi, said the ravaging new strain could test the market’s ability to continue to weather the storm. He admitted the market has been relatively stable and that it is not likely going to spike in the near term.
He, however, warned that a reasonable fall in the prices of oil could upset the current stability. The economist sees a comfort zone at $75 per barrel oil price.
He noted: “There is a temporal respite. And it is not likely going to spike considering that we are already in December. It is also good that our reserve is rising. The banks give money to those who already have money.
“In the same way, when your reserve level is comfortable, you are able to borrow from the international market. We only hope that the price of oil will not fall drastically. If oil prices continue to fall, there could be another crisis.”
Ogiemwonyi said there could be another crisis mid-next year when active partisan politics begins. Until then, he said, the current stability in the FX market appears to be sustainable.
It is four months into the suspension of sales of FX to BDCs and a switch to DMBs. The decision triggered a shock as banks struggled to adjust to the new responsibility.
In resolving to replace BDCs, the apex bank believed it could leverage its regulatory framework to secure compliance.
Unlike the case when the BDCs were in charge, anyone going to buy FX for personal and business travel allowance (P/BTA) is expected to provide the documents required by the CBN.
The number of BDCs, which are estimated at over 4,000, made effective monitoring difficult. On the other hand, the banks are fewer and have an existing relationship with the apex bank.
BDCs were previously accused of profiteering whereas banks are expected to make returns. The CBN had directed the banks to set up front desk officers and systems to ensure FX was available to the eligible buyers. The apex bank, as well, set up a desk to receive complaints from end-users.