By Victor Ogiemwonyi
Last week the Central Bank of Nigeria (CBN) issued a circular expressly forbidding the using foreign exchange collateral for Naira loans booked by the nation’s banks.
This circular, which again confirms that there is a lot of solid thinking going on at the CBN under the current board and management, also directs those already exposed in this area to wind down their positions in 90 days.
This kind of transaction the CBN is addressing through the circular is called “Carry-Trade,” which refers to when you bring FX to trade in another jurisdiction by taking a loan in the local market and collateralizing it with FX deposit. It purely signifies that the investment is short term and only aimed at making a profit.
In what seems an alternative, the CBN may have instead used the current high interest rate regime to attract investors to its instruments, while making it clear that it will not condone unrestrained speculation in the FX market.
Surely, the policy is Excellent in its timing to be sure, to the extent that It will mitigate the speculative capital that can affect an economy quickly.
We saw the destructive impact of currency speculation evidently in the Asian Financial crisis of 1997, when speculators took on the Thai (Thailand) currency, the Bhat and the Malaysia Ringgit. The economic consequences were so severe, that it prompted Mr Mahathir Mohammad, the then Prime Minister of Malaysia to call Billionaire George Soros a moron.
In his words, ”we spent years developing our economy, that has helped many rise to the middle (income) class, and a moron like Soros, comes around and ruins everything.”
On his part, Soros responded by describing Mr. Mohammad as “a hindrance to his country,” insisting along with other currency speculators that they are a “force for good“ in a market economy. This is given that their activities ensure bad economic policies, propping up weak currencies are not allowed to stand. They argued that their speculation makes economies competitive.
Regardless of the economic logic for and against speculation, countries like Nigeria should be prepared. We have learnt from the Asian crisis and should ensure Speculators become aware that Nigeria is watching their activities. The recent circular from the CBN points eloquently to this.
The 90-day window given Nigerian banks to wind-down the loans under reference is also an appropriate time frame to wind down these loans. Most of the loans are already short-term in nature, any way.
The Carry-Trade, is also a structured speculative trade. It is one, of the ways to speculate in currencies and other market assets, legally.
It starts with pairing two interest rates and taking position in currencies and other market assets.
If this practice is not checked early, it can become a contagious problem that can create bubble capital rapidly, from speculative bets which is commonly referred to as “ Hot Money.”
That is the capital that leaves without notice. It is clear that Nigeria cannot afford such speculative trading at this time. Let us settle the money already in the system, while we carry on with other reforms quickly, to increase our attractiveness as a destination for investment.
The foregoing not withstanding, we must also point out that speculative Capital is not all bad. It is like taking a short-term loan to tidy up your financial position. Foreign portfolio investments of this type, provides the immediate liquidity needed to fund the FX market which gets the economy going, while we work to restart properly.
We must quicken our reform efforts, to make our economy attractive for increased Foreign Capital inflow.
We already have an attractive and even large market with our huge population. Further investment in the Health and Education sectors, while focusing attention on our energy infrastructure and security will be of great advantage to our large population.
We will also need to give our youths the technical skills necessary to make them more employable.
Only strong growth can guarantee full employment. In specific terms, we will need double digit growth in the next decade to ensure this, and make our economy attractive.
This is why the current high interest rates need to come down as quickly as the CBN achieves its objective of mopping excess liquidity in the system, and restoring some reasonable stability for the Naira.
The Africa Continental Free Trade Agreement (ACFTA) is a gift to Nigeria, but only if we know what to do with it.
For instance, we have a potential to substantially increase our exports and reduce our imports, as we manufacture more of what we need. We must sincerely push our Agriculture to produce more, for our own consumption and for exports. We have all the God given comparative advantages, good soil, huge population and a deep market that provides the needed incentives.
As Nigeria become more productive overall, the Naira will naturally get stronger.
We have just passed a milestone that many are yet to take notice of, by allowing the Naira to find its value even in this down economy. The Naira found support at N1900, which in the short is the currency’s worse, below which we may not expect the Naira to fall.
The CBN is also now preemptively and intelligently signaling the value through the funding of the Bureaux de Change market, which is essentially the Black Market.
We expect that companies which genuine need for FX can now plan for it.
Ogiemwonyi, a retired Investment Banker, and writes from ikoyi, Lagos
