The economy of Nigeria suffers a huge crisis while corporate bodies and foreign investors are moving funds massively out of the country.
According to the CBN (Central Bank of Nigeria) survey of payments, a total of $22.1billion went out of the country in five weeks, an average of $4.5 billion a week.
The estimates show that about $3.083billion went out in the week ending 31st July 2014, the amount of foreign exchange flowing out of the country rose to $4.2 billion for the week ending 30th August. It however dropped to $4.1billion on the 30th of September and moved astronomically to $5.29 billion for the week ending 31st October 2014. The foreign exchange outflow went further up to $5.35billion for the week ending November 30th.
This capital flight caused the crash of the Naira exchange rate which had remained stable before the election and the crash of the international crude oil price. However, CBN has attributed the collapse of the Naira at the inter-bank to currency speculators who buy and hold currency for them to sell at a future date to make some gain.
CBN states that in the five weeks, the total amount of foreign exchange that went out through direct remittances amounted to $3.33billion, Debt service/payment — $155million. The bulk of the outflow went through the wholesale at the Dutch Auction market where a total of $18.6 billion was purchased from the CBN. Curiously, foreign exchange purchases backed by Letters of credit in the five weeks amounted to just $108.8 million.
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Capital flight has led to the depletion of Nigeria’s foreign reserves, thus weakening the Naira. Nigeria’s foreign exchange reserves, which was $5.4 billion in 1999, rose to an overwhelming level of $51.3 billion at the end of 2007 and further to $53.0 billion in 2008, but owing to the crash in the international price of crude oil in 2008 and the aftermath of the global financial crisis, the reserve declined to $42.4 billion in 2009, further declined from $38.138 billion at the end of April 2014 to $33.04 billion in February 2015.
Last week CBN scrapped the Retail and Wholesale Dutch auction of foreign exchange saying that all genuine importers should source funds from the inter-bank market. It however said that it will continue to intervene in the inter-bank foreign exchange market.
The apex bank in a statement signed by Mr. Ibrahim Mu’azu, Director of Communication, said: “The managed float exchange rate regime, which the bank had adopted following the liberalisation of the foreign exchange market, has for the most part been successful in ensuring exchange rate stability in line with its mandate.In recent times, however, with the sharp decline in global oil prices and the resultant fall in the country’s foreign exchange earnings, the bank has observed a widening margin between the rates in the inter-bank and the RDAS (Retail Dutch Auction System)window, thus engendering undesirable practices including round-tripping, speculative demand, rent-seeking, spurious demand, and inefficient use of scarce foreign exchange resources by economic agents.This has continued to put pressure on the nation’s foreign exchange reserves with no visible economic benefits to the productive sector of the economy and the general public."
The statement also adds that the Retail Dutch Auction System (RDAS/WDAS) foreign exchange window at the CBN is hereby closed and all demand for foreign exchange should be channeled to the INTERBANK FOREIGN EXCHANGE MARKET.
In a flash note to investors, Afrinvest, an institutional investor said: “This is a positive development as we have always clamoured for a one-way quote to reduce speculation and unhealthy malpractices. The development can be tagged a tacit devaluation of the Naira given that the CBN will sell at the pre-existing inter-bank rates. As a result, we expect to see some stability at the inter-bank market in the short term as there will be no incentive to round trip or speculate given the minimal spread between the inter-bank rate and the parallel market. In addition, the banks will likely forfeit the huge spread earned on forex trading as offer will be filled on “demand basis”.