In the popular book 48 laws of Power, author Robbert Greene writes in the 15th law that you crush your enemy totally! It appears the CBN is heeding that advice.
The Central Bank of Nigeria shocked Nigerians on Monday when it announced that it had instructed deposit money banks to sell dollars to retail buyers at a fixed price of N360/$1. The instruction rattled the speculators which were just reeling from a week that saw the exchange rate at the parallel market crash below N400 for the first time since August 2016.
To the extent that the CBN’s does not have an infinite supply of FX this latest development could have varying implications for Nigeria and understanding what the motive is could provide insight on where the exchange rate is headed.
New Circular
The CBN instructed banks to sell forex to retail investors looking to buy for PTA, Medical Allowance and School Fees to do so at a price not exceeding N360. The CBN will in turn sell Forex to banks at a price of N357/$1, making a spread of N3 or 0.08%. Before now banks were to buy from the CBN and N305 and sell at a premium of not greater than 20%.
BDC will also now be sold forex at N360 allowing them to resell to retail buyers at N362. The CBN has effectively shut down any arbitrage positions between the banks and BDCs.
From what we gather the CBN believes that it has enough supply to deal a crushing blow to speculators looking for a rebound at the black market.
With the exchange rate closing at N390/$1 last Friday at the black market, the CBN saw an opportunity to finally close the gap between the official and parallel market rate. The rate is currently at 7% just two percent shy of the 5% seen as a comfortable premium by some analysts.
Why this battle?
While some analysts viewed the central bank might be overtly excited in showing its hands in a game of who blinks first, the impression we get is that the CBN is relying on a combination of qualitative and quantitative factors in deciding what to do next. We do not have the data the CBN has but we will attempt to postulate its qualitative reasons .
Clog in retail
Firstly, the CBN may have basically cleared the backlog of demand in the retail end of the forex market. Most of the demand that will typically be directed at the parallel market is now being shifted to the official banks currently being filled by banks and BDCs.
Weak Purchasing Power
Secondly, it appears that the purchasing power of a lot of Nigerians have dwindled in recent months as Nigerians become more frugal in the utilization of their disposable income. The economic recession coupled with the over 50% depreciation of the Naira in the last two years have negatively impacted on their consumption choice. Only the rich and a section of the middle class can afford to take up the full compliment of the PTA even if they wanted to go on vacation. A $4,000 PTA will cost about N1. 48m excluding tickets. Very few Nigerians have such deep pockets.
Pent Up demand
Thirdly, international companies that got caught up in the capital controls introduced last year by the CBN have gotten smarter and no longer rely on the CBN to get their cash. In an indirect form of devaluation, these companies now charge clients and customers in hard currency reducing their reliance on the CBN to repatriate most of their funds. An aviation industry source informed Nairametrics that most airlines charge tickets in dollars and when they charge in Naira it’s often more expensive as it accounts for currency fluctuations. The rates are more expensive than CBN official rates of N306.
Demand for repatriation of dividends are also thought to have reduced as recent results released by companies reveals declining earnings and when there are profits they are mostly on paper and not backed up by strong cash positions.
Portfolio Investors
The Nigerian Stock Market Capitalization has basically remained below N9 trillion for almost a year now. Investors point to the weaker FPIs transactions as one of the reasons. However, the lesser the inflow of FPIs, the less pressure there is on outflows.
In the 47th law Robert Greene advice, in battle, do not go last the mark you aim for, in victory, know when to stop.
The CBN may be winning at the moment, however it walks on an icy surface. It’s plans could either continue go smoothly or it could slip back into the abyss of a currency crisis that have gone on for 2 years now.
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