Last week, my bureau de change provider called to “check” on me which is usually followed up by an offer to sell me pounds. This time around, he did not. Inquisitively, I asked him for the rates and he replied “oga 600”.
I now understood why he didn’t ask. He knows I wouldn’t buy at that rate because my status qualifies me to buy at CBN rate from the bank. But it has been herculean getting forex from the banks. Additionally, the banks are reducing international withdrawal limits.
Some reports say the banks are hoarding and round tripping, some say the banks aren’t receiving forex from CBN. It’s 2016 again. It’s another dollar crunch again. It’s another aftermath of an oil price crash.
Nigeria, Africa’s largest economy, is heavily reliant on crude oil, which makes up about 90% of its export earnings. 60% of Nigeria’s Federal Government revenue comes from oil sales and it’s little wonder why the relationship between the Nigerian economy and the price of oil are as positively correlated as the ground getting wet whenever it rains.
So when the price of oil crashed in March, 2020 as a result of the deadlock between Saudi Arabia and Russia, the alarm lights at Plot 33, Abubakar Tafawa Balewa way, CBD, Abuja started flashing red. The oversupply of the oil market and shortage of demand as a result of the COVID-19 pandemic led to another significant oil price decline.
A decline that led up to mid-April, oil had begun selling at negative prices. Storage tankers were being paid to receive oil from oil producers as storage capacity had been maxed out. With lots of unsold oil at Nigeria’s cargoes, the country’s economic growth began to stall with revenues dwindling.
The crisis consequently triggered two conditions that Godwin Emefiele, the Governor of the Nigerian Central Bank, said would be needed to be met for the CBN to consider devaluing the naira. The first, which is a drop of the oil prices below $45 per barrel and the second which is crude oil external reserves falling below $30 billion.
In a series of events, beginning in March, the CBN devalued the dollar to 380 naira. The Federal Government revised the 2020 budget oil benchmark and pegged it to $25 per barrel. Taking into consideration, there was a deep contango in the market, a situation where oil future prices (prices on charts) are higher than the spot prices (the real market price), oil revenue significantly reduced. It is also noteworthy to take into account that the cost of production for oil in Nigeria is $23, which translates to low profit margins from future sales at $25.
Fast forward to April, Oil cartel OPEC+ called for an emergency meeting after interventions from U.S President Donald Trump, to salvage the oil crisis created by the glut from supplying nations. A tweet from Donald Trump propped up the prices by 25% to $29.83.
Despite a few pullbacks, the success of the OPEC meeting began showing dividends. 9.7 million barrels of oil had been agreed to be taken out of the market to create an equilibrium between supply and demand. Oil prices began to recover remarkably and given the context of negative prices as at April, today’s price at $45 is a laudable feat by OPEC+.
But the naira does not seem to follow the path of recovery. As at the day of writing , the naira’s blackmarket rate declined to 475 per dollar. Seeing daily notifications on exchange rate changes from AbokiFx is not for the faint hearted, as it appears the naira keeps declining to other currencies.
Nigeria’s dollar deficiency crisis which is mirrored in the Central bank battle to respond to an accumulation of dollar requests from foreign investors, with manufacturers finding it hard to get dollars to import raw materials. Unfortunately, there are murmurings that those with access to dollars are creating arbitrage in the forex market.
The CBN’s gross external reserves have declined after shrinking 12 percent from $45 billion at the start of the year. Foreign investors have been particularly worried by the trend which surely rekindles bitter memories from 2016 when the foreign exchange backlog swelled to as much as over $4 billion as investors could not take out their money.
A quick overview on the below charts explains the inverse relationship between oil prices and naira/dollar exchange rate. In the past ten years, when oil prices were high, the naira/dollar rate remained low and as oil prices started declining, the naira/dollar rate started moving in the opposite direction.
Is there hope the naira will recover?
This article is written in complete oblivion of the CBN’s plan but rather an analysis on when we can arrive at the two ‘pre-conditions’ that led to the CBN not devaluing the naira earlier. The two ‘preconditions’ are the return of oil prices above $50 and the return of the external reserves above $30 billion.
With the former, oil prices have scratched the $46 mark in the past weeks and with more demand from China and economic activity globally, we are expecting prices to rise further. Most market participants have increased their long positions as of August. The latter pre-condition appears more difficult to place, given the expenditure of the government and CBN’s plans.
With external reserves currently at $35.9 billion, we are in the territory which should appear safe. However, a rise to $45 billion where the CBN Governor issued the conditions would be comforting. With production of oil barrels at 1,488, 000 barrels as at July count, prices and demand need to go further up to increase the country’s revenue.
According to data obtained in July from the Central Bank of Nigeria (CBN), Nigeria’s foreign exchange reserves stood at $35.9 billion, compared to the 36.2 billion in June 2020. Although this represents a decline, we can examine the data in April when oil prices started recovering where the Nigerian foreign exchange reserves stood at $36.57 billion as at June 4, 2020. 33 days earlier on April 29, 2020, Nigeria’s foreign reserves were at $33.42 billion. This represents a gain of $3.15 billion dollars in 33 days.
In other related indicators, this week there have been some reports that the Central Bank of Nigeria will resume sales of forex to BDCs as international flights might resume soon. This follows calls by prominent market experts to inject dollars to the BDC to stop the slide of the naira against the dollars. Just like 2016, we hope more liquidity would alleviate the situation and give the exchange rate a positive outlook.
By Opeoluwa Dapo-Thomas