By Emmanuel Mayah and Esme Lowe (UK)
Foreign military aggression, gun-boat diplomacy, trade war and lately; exportation of strife in the form of insurgency and terrorism are not the only ways to attack the political fortune of a sovereign nation. Another, and perhaps the most insidious, is covert attack on the country’s currency. In this case the Naira.
Barely one month after Godwin Emefiele assumed office on June 4, 2014 as Central Bank Governor, the first proxy attack – under his watch – on Nigeria’s Foreign Reserve happened. The United States, beginning July 2014, terminated importation of oil from Nigeria whose primary source of dollar inflows was crude export. Nigeria was not at war with the US but the Naira was ultimately taking a beating.
Jeff Zients, at the time White House Director of the US National Economic Council, said the cessation of oil imports from Nigeria arose from a significant rise in US oil production.
The reduction of US oil importation to zero marked the first time since 1973 that the US did not import oil from Nigeria. Until the dramatic reversal Nigeria was still among US’s top 5 oil suppliers – a factor significant to its status as Africa’s largest economy. At the peak of their trade relationship, Nigeria was exporting 1.3 million barrels per day to the United States.
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The Deutsche Bank, apparently snorting at America’s official excuse for the unforeseen, drastic and total freeze of oil imports from Nigeria, suggested a possible political connotation. Though Nigeria’s high quality crude – easily processed into higher octane gasoline – was always the preferred choice to American refiners, Middle East producers such as Saudi Arabia and Kuwait continue to pump crude oil of a lower quality that US Refiners continue to buy even in the wake of massive shale output.
The freeze suggested an agenda to strangulate Nigeria’s oil exports and to dry up its forex.
While the US’ foray into shale oil production may had on the surface justified the termination of oil transactions with Nigeria, it could not explain America’s continued importations from other oil producing nations, including OPEC members like Saudi Arabia and Kuwait and non-OPEC suppliers like Canada.
At the same time the US completely halted oil imports from Nigeria, it increased its crude oil importations from Saudi Arabia, Kuwait and Canada. Additional economic actions strangulating the naira followed in the succeeding years.
From zero oil import from Nigeria, the US went on to export its own oil to countries that had been traditional buyers of Nigerian crude.
Using new technologies such as horizontal drilling and hydraulic fracturing or fracking, the surge in US’ shale output turned America into the world’s top crude producer who deliberately began to put the Nigerian oil under pressure in Europe and Asia.
Traders and shipping data showed how the US flooded the European market with what one energy trader described as “a sea of cheap U.S. oil.”
Data from Refinitiv Eikon show that after Washington lifted a 40-year ban on exports of U.S. oil in 2015, shipments to Europe hit an all-time high of 25 million barrels in March 2019 from just 2 million barrels in February 2016. This encouraged European refiners to driving a hard bargain, offering lesser prices for Nigerian crude.
Determined to offset the impact of the US actions, Nigeria began lifting exports towards Asia. According to Platts, a specialized information service for the oil industry, Nigerian oil sales to Asia’s four largest oil importers – China, Japan, India and South Korea – rose more than 40 per cent under the Muhammadu Buhari government.
Steady demands for Nigeria oil from India whose economy has been growing and also from Indonesia helped to checkmate European refiners from dragging market price much lower.
But U.S. oil is also heading to India, where it is increasingly competing with Nigerian crude. Indian Oil Corp, the country’s top refiner, signed its first annual deal to buy U.S. oil in February 2019, paying about $1.5 billion for 60,000 barrels a day up to March 2020.
As Nigeria continued to lose its favourite oil export destinations to the United States, the Crude Oil Export Destination Report of the Nigerian National Petroleum Corporation (NNPC) in 2017 showed that China, Peru, and Japan have totally stopped importing crude oil from Nigeria.
Data from Energy Information Administration (EIA) showed that other countries like The Netherlands, United Kingdom (UK), Italy and Switzerland were also importing from the US. Though the Buhari administration was able to steer new imports to the US, Nigeria’s exports of crude and petroleum products to the United States plunged from 36.4 million barrels in July 2010 to just 5.6 million barrels in January 2019, according to the EIA.
In monetary terms, Nigeria’s forex pipelines from America, Europe and Asia were either completely turned off or coming in trickles.
Since the first quarter of 2020, Nigeria has faced an exchange rate crisis triggered by the drop in oil prices. With oil prices down, pressure on Nigeria’s exchange rate grew. So also did pressure on the CBN Governor.
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Indeed, the job of the Central Bank Governor of Nigeria is no different from that of the weatherman who must constantly watch out for and device responses to hurricane, cyclone, monsoon rain, tsunami and even drought. It is a clock work.
Reserve Assets Management
Reserve assets also called foreign exchange reserves or external reserves are regarded as the health meter of a country. They are those external assets that are readily available to and controlled by a country’s monetary authorities to support and maintain confidence in the policies for monetary and exchange rate management including the capacity to intervene in support of the national currency.
Nigeria’s forex reserves are assets such as foreign currencies; old coin or bullion; treasury bills (with a maturity period not exceeding one year) issued by the government of any country outside Nigeria whose currency is freely convertible; securities of, or guarantees by, a government of any country outside Nigeria whose currency is freely convertible; securities of, or guarantees by international financial institutions; Nigeria’s Gold Tranche in the International Monetary Fund (IMF); allocation of Special Drawing Rights (SDR) made to Nigeria by the IMF; and investment by way of loans or debenture in an investment bank or development financial institutions within or outside Nigeria for a maximum period of five years.
The CBN maintains these reserves to balance the country’s payments, help influence the foreign exchange rate, and support confidence in financial markets. They are essentially the bank’s back-up funds that can be used in case of emergency.
In essence, foreign reserves give the government the confidence and resilience to withstand shocks if a country’s currency crashes or devalues.
In the last six years of volatility in the global oil sector, Nigeria’s foreign reserves have made headline either by moving upwards or downwards. The CBN is the war room where the governor marshals responses to safeguard the international value of the Naira.
Through interventions in the foreign exchange market, the CBN governor has severally deflected financial ill-winds and limiting external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis or when access to borrowing was curtailed. Clinical in approach, he has had at critical moment demonstrated confidence to the international community that Nigeria is always able to meet its external obligations.
Covid-19, China Slowdown and Rebalancing
The Corona virus proved to be an existential threat not only to the ordinary man but to big nations and the smaller ones tied to their economic apron strings. China’s slowdown in the wake of the pandemic had a telling effect on developing countries including Nigeria. In October this year third-quarter data revealed that the Chinese economy slowed to its lowest pace in a year.
Calculations based on UN COMTRADE show that Nigeria export 99.9 of its intermediate goods to China. For the CBN Governor, China’s slowing economy has delivered a sick child in need of a cure. Like the weatherman, season by season, it is one precarious weather conditions after another to be predicted and to be contained.
Naira defence measures under the Emefiele regime
In the past years various foreign exchange policies have been introduced by the Central Bank of Nigeria to strengthen the Naira.
In a move to achieve exchange rate stability and preserve the country’s forex reserves, the CBN in 2015 reviewed downwards the spending limit on the usage of naira-denominated debit cards for transactions abroad. The apex bank said the limit had been reduced from $150,000 to $50,000 per person annually, while a daily cash withdrawal per person was pegged at $300.
In June 2015, the CBN announced that it was stopping the supply of forex to 41 items that could easily be produced in Nigeria, a development that brought about the forex exclusion policy.
The implication of the policy was that importers of items on the forex restriction list could no longer get forex directly from the windows created by the apex bank to bring the products into the country.
Nigeria’s food import receipt, for example, has always been a cause of concern. In 2020 alone, the country imported $534m worth of refined sugar from Spain, Brazil, France and India, and $2.5bn worth of dairy milk from the Netherlands, UK, US, Australia, and others, to power its value chain for everything from evaporated milk, pasteurized milk, to yoghurt, cheese, chocolate etcetera.
According to the CBN, “The implementation of this policy will conserve foreign reserves as well as facilitate the resurrection of domestic industries and improve employment generation.”
In July 2020 the CBN restricted access for the importation of maize through the official CBN forex window. It hinged its decision on the need ‘to increase local production, stimulate a rapid economic recovery, safeguard rural livelihoods and increase jobs which were lost as a result of the ongoing COVID-19 pandemic.’
In August of the same year Emefiele removed buying agents/companies or any third party from accessing its SMIS forex window through FORM M forex purchases. Authorized Dealers were directed to desist from the opening of Form M whose payment is routed through a buying company/agent or any other third parties, effectively eliminating third parties or middlemen from transacting in forex deals in CBN’s SMIS window.
In the same August 2020, Godwin Emefiele vowed to go tough on exporters who were guilty of forex non-repatriation. It was part of his efforts to resolve the prevalent forex crisis in the country by increasing forex liquidity.
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To that end, the CBN directed banks to submit the names, addresses, and Bank Verification Numbers (BVNs) of all the exporters who had failed to repatriate their export proceeds, for necessary ‘action’.
On November 20, 2020
the CBN announced the amendment of procedures for receipt of diaspora remittances in an attempt to improve liquidity in the forex market and reduce the disparity between the black market and official I&E window. In the new amended procedure, beneficiaries of Diaspora Remittances through International Money Transfer Operators (IMTOs) would thenceforth receive such inflows in foreign currency (US Dollars) through the designated bank of their choice.
In March 2021 the CBN introduced a ‘Naira 4 Dollar Scheme’ for diaspora remittances, which offers recipients of diaspora remittances through CBN’s IMTOs to be paid N5 for every $1 received as remittance inflow.
Perhaps one of the most far-reaching policy interventions by the CBN under Godwin Emefiele was in July 2021 when the apex bank took on the Bureau De Change (BDC) for illegal forex trading and thenceforth discontinued the sale of forex to BDC operators in Nigeria. The CBN equally announced it would no longer license new BDC operations in the country just as all current processes for new licenses were halted.
On August 17, 2021 a federal high court in Abuja granted the request of the Central Bank of Nigeria (CBN) to freeze accounts of six fintech companies.
The apex bank said it was investigating “illegal foreign exchange trading” by the fintech companies. It sought the court injunction to freeze their account details for 180 days pending the completion of investigations.
The accounts include Rise Vest Technologies Limited, Bamboo Systems Technology Limited, Bamboo Systems Technology Limited OPNS, Chaka Technologies Limited, CTL/Business Expenses, and Trove Technologies Limited.
The CBN alleged that Rise Vest Technologies Limited, Bamboo Systems Technology Limited, Chaka Technologies Limited and Trove Technologies Limited were complicit in operating without license as asset management companies “and utilizing FX sourced from the Nigerian FX market for purchasing foreign bonds/shares in contravention of the CBN circular referenced TED/FEM/FPC/GEN/01/012, dated July 01, 2015.”
The CBN Governor took a two-pronged action on September 17, 2021. He announced that
that the apex bank in partnership with commercial banks will go after Nigerians who bought dollars with the pretence of traveling abroad. According to him, the bank will find the people and ensure they refund the dollars (PTA/BTA) they bought only to cancel the tickets.
He also refered to one Mr Olumide Oniwinde, owner of AbokiFX as an illegal FX dealer who will be prosecuted for endangering the Nigerian economy.
AbokiFX is a website that publishes the parallel market exchange rate of the Naira against other currencies of the world on a daily basis.
According to the governor, Mr Olumide Oniwinde started AbokiFX operation in 2015 and has since milked the economy by taking a position, while manipulating the exchange rate.
He stated that, “The CBN act section 2, does make it clear that only the Central Bank can determine the value of the naira, and yet a single individual living in England continues to manipulate the exchange rate and make huge profit which he withdraws through an ATM in London.” Eurobond gains
Whenever oil price crashed, Nigeria’s foreign reserve is battered. However, Nigeria’s foreign reserve recorded a further boost of $566.45 million on 18th October 2021 to close at $40.39 billion compared to $39.82 billion recorded in the previous week.
The reserve position has now surpassed the $40 billion mark, largely driven by the fund raised by the federal government to the Eurobond and recent positive rally at the global crude oil market.
Nigeria raised $4 billion Eurobond in September 2021 which, oversubscribed by investors, was dubbed one of the biggest financial trades to come out of Africa in 2021.
The positivity spurred the Naira to appreciate at both the parallel market and the official window.