Michael Martins, a civil servant based in Abuja, planned his annual vacation in the United States. Sadly, his holiday was cancelled after it dawned on him that getting the needed dollar for the event would be difficult and expensive. That was in January last year when the naira exchanged at N485 to the dollar and getting it was even more tasking given the acute shortage of the greenback.

By February last year, the Exchange Rate had climbed to N520 to dollar at the parallel Market and many parents abandoned their children in foreign schools because of the difficulty in accessing foreign exchange (forex) from the market.

Those experiences persisted till April 2017, when the Central Bank of Nigeria (CBN) introduced the Investors’ and Exporters’ (I&E) Foreign Exchange Window that allowed foreigners and investors to pump in dollars into the economy at their own rate. The pricing for the dollar was then determined by market forces.

In the first two weeks of introducing I&E window, forex speculators lost over N500 million, as the CBN sustained its dollar interventions in the interbank market. The losses grew to over N1 billion in the first two months after more foreigners began to use the window, and its impact on the forex market deepened.

The economy has also enjoyed major inflow of forex in recent months with over $20 billion recorded in the I&E FX Window. The window, also called “willing-buyer willing-seller window”, allows foreign investors to find buyers for their dollars at a mutually-agreed price. The CBN controls about 15 per cent of all the transactions carried out in the window.

As it stands now, Martins will have no problem accessing forex for his vacation trips given the level of stability and liquidity already attained in the forex market.

The introduction of I&E Forex window was followed by continuous interventions by the CBN which enabled banks and Bureau de Change (BDC) operators to meet forex demand at the retail end of the market. The naira now exchanges at N362 to dollar at both the BDC and parallel market rates while the official rate for the local currency stood at N305.6 to dollar.

Aside establishing the I&E Forex window, the CBN also opened a special forex window for Small and Medium Enterprises (SMEs). The window, which allocates $20,000 per business per quarter, helps the SMEs import “eligible finished and semi-finished items” needed for their businesses.

Explained what necessitated its special intervention, the CBN said its investigations showed that many SMEs were being crowded out of the forex space by large firms.

The CBN Governor, Godwin Emefiele, had earlier called for a change of lifestyles among Nigerians to sustain the local currency’s recovery against the dollar. In a campaign shared by the bank’s spokesman Isaac Okorafor, Emefiele said: “The size of Nigeria’s reserves and the value of the naira critically depend on our lifestyles and on the value and types of imports we allow into the country.”

Emefiele’s message implied that a change in consumption pattern from foreign to indigenous goods would impact positively on the value of the local currency.

Analysts said the CBN’s assurance to stakeholders of its continued intervention in the forex market, a promise it has kept for more than seven months, stabilised the market.

But, stability is bad news for forex speculators. They prefer volatility which means more profits to them.

According to the Currencies Market Head at Ecobank Nigeria, Olakunle Ezun, the forex market has lost its drive for profitability and it is no longer exciting for players. He said the boom time for forex dealers ended after the CBN kept its dollar intervention promises.

“In terms of forex business, it is not as exciting as it used to be. What makes the market exciting is volatility. The operators are not always happy when market becomes stable, because their profit margin drops. The profit-taking opportunity in the market is very lean at present and so are the turnover and spread,” Ezun said.

He said the Naira’s currency crisis was triggered by the dip in crude oil prices, which adversely affected Nigeria’s foreign reserves and created chronic dollar shortages. It was the need to curb these dollar shortages and stabilise naira against world currencies that prompted the CBN to regularly inject dollars into the market to narrow the spread between the official and black market rates. This measure has not only led to convergence between parallel and black market rates, but has chased currency speculators out of the market.

The banks get dollar supplies to meet genuine forex users’ demand, just as the black market operators, whose cost of operation, though the lowest in the value chain, remain in business.

“The black market operators do not need licence to operate. Neither do they demand for documentation from forex buyers. They are simply doing cash and carry business and have largely benefited from the rate convergence although their profit margin has also dropped,” a Lagos-based BDC operator, Isah Yakubu, said.

He said that the black market forex has been in operation for over 100 years, adding that patronage for this market has continued at all times, not-withstanding the state of the economy and forex market.

For currency speculators, who buy dollar for keep, and sell when it strengthens, the forex business has been a nightmare after the CBN sustained its interventions. After recording huge losses in naira and foreign currencies, the speculators seem to have been chased out of the forex market.

Confirming the development, the President, Association of Bureaux De Change Operators of Nigeria (ABCON), Aminu Gwadabe, said that with rate convergence at both the BDC and parallel markets, and transaction margins narrowed to N2 in most cases, the market seems unattractive to speculative dealers.

Afrinvest West Africa Limited Managing Director Ike Chioke said the jump in foreign inflows was not a surprise given the development in the forex market, particularly the launch of the I&E forex window in April.

Chioke said “The knock-on effects of strong portfolio flows are already evident in performance of the domestic equities market which has historically been driven by foreign portfolio investors.”

According to him, there has been a strong positive correlation between the exchange rate and crude oil price in the country.

Sub-Saharan Africa Economist at Renaissance Capital and co-Author of the Fastest Billion Yvonne Mhango said the CBN has shown absolute commitment to dealing with dwindling fortune of the naira.

“While Nigeria cannot do much to influence the oil price, the combination of measures sends a powerful signal to all stakeholders on the CBN’s intent to do what it can to preserve macroeconomic stability,” she said.

The forex restriction placed by the CBN’s on 41 items from accessing forex from official windows was one of such policies. More than two years after the policy shift, its objectives, such as encouraging local production of the affected items and boosting local industries suffocated by the importation of competing products are being realised.

The policy implementation was part of the home-grown solutions introduced by the apex bank to sustain forex market stability and ensure the efficient utilisation of available forex to grow critical segments of the economy.

The policy implies that those who import these items can no longer buy foreign currency from the official window to pay overseas’ suppliers. They source forex from the parallel market or BDCs to pay for their imports.

Emefiele said the bank has been developing home-grown policies to surmount challenges that plunged the economy into turbulence in recent times.

For instance, over the last 10 years, the CBN had invested over N2 trillion in funding agriculture, SMEs and other manufacturers in the value-chain.

The regulator said the apex bank would continue to support operators in the agriculture, SMEs and manufacturing enterprises through its development finance initiatives, with a view to complementing the Federal Government’s efforts at diversifying the economy and making the nation self-sufficient in food production.

Speaking on the banned items, Emefiele said: “The issue of those 41 items, unfortunately, is one that has been on my table. But, I think it is important that in the life of an economy, there is a need for us to take a look and ask ourselves: what really are we importing into this country?

“When this thing started, we said: ‘Why should we import rice? Why should we import toothpick? Why should we import palm oil?’ At a point in this country, Nigeria was the largest producer and exporter of palm oil and we were controlling 40 per cent of the market share.

“So, there is the need for us to say at this time when there is a scarcity of forex, it should be set aside for the import of items we cannot produce in this country.”

Emefiele’s logic was that the importation of items, such as palm oil, makes local producers poorer.

“When we import rice, we impoverish the rice producers in Abakaliki, Kebbi, Sokoto, Katsina and other parts of the country. We need to look at that very seriously because God has blessed this country, with good climate, good weather, which should be taken advantage of. Since we can produce these things, let’s use them to feed our people so that we can save foreign exchange for the country.”

The CBN chief said he was satisfied with the outcome of the policy, adding that more time was needed to evaluate its success. He said the policy could be reviewed when it was concluded that local manufacturers of the restricted items had become very competitive.

He clarified further: “My view would be that if you have forex, you should devote it for the import of items that are important and can’t be produced in the country.

“If you have excess forex, save it or create reserves. My view, which is the view of the government, is that there are certain items that we can produce locally.

“But, by importing some of these items, you impoverish the people. How can we create jobs for our people by living like that! Donald Trump is the President of the largest economy in the world. When he was campaigning, he said everything must be about America and he takes the interest of Americans first into consideration and by doing that, you create wealth for your people.

“I got engaged with some of these people where Nigeria imports from and I said to them: ‘You want us to import fish from you, please tell me, what can you import from Nigeria, and he said nothing.’ I feel that is not a good answer from a colleague in the financial sector. So, that is the reason you have to be smart to tell yourself that I can produce it and because I can produce it, I have to produce it and use it to feed my people and save the country foreign exchange.”

Emefiele disclosed that the government policy on support for local production was gaining ground and attracting the interest of multinational companies who were already investing in rice production.

He said: “We have seen multinationals coming to say they want to join in palm oil production. For instance, go to Cross River State, PZ Wilmar has been cultivating 58,000 hectares of palm plantation; Presco, Okomu are all doing something. So, if a PZ Wilmar needs foreign exchange because there is a little gap, I will not mind giving them because I have seen the interest they have shown cultivating more land.

“We have seen people like Coscharis, who hitherto had been in automobile imports, has acquired thousands of hectares of land in Anambra trying to grow rice. We were there last year and this year we would be there again to see what they have done.”

The CBN said part of its mandate would be to act as financial catalyst in targeted sectors of the economy with humongous potential for creating jobs, reducing the country’s import bills in a very significant manner.

It said monetary policy alone cannot fully achieve the objective of macro-economic development through real sector financing.

Some of the measures put in place by the CBN to end the naira crisis include the first Naira-Settled Over-the-Counter (OTC) Forex Futures Market (FFM) launched with FMDQ OTC Securities Exchange and the planned resumption of dollar sales to the BDCs.

The FMDQ OTC Securities Exchange (FMDQ) is an organisation with the strategic intent of bringing about revolutionary changes and fostering the development of the Nigerian financial markets

The Naira-Settled OTC Forex Futures are non-deliverable forwards, or a contract where parties agree to an exchange rate for a pre-determined date in the future, without the obligation to deliver the underlying dollar on the maturity/settlement date.

On the maturity date, it will be assumed that both parties would have transacted at the spot forex market rate. The party that would have suffered a loss with the spot forex rate will be paid a settlement amount in naira to ensure that both parties enjoy the rate that had been guaranteed to each other through the OTC Forex Futures.

The FMDQ’s Managing Director/Chief Executive Officer Bola Onadele Koko said: “The Naira-Settled OTC Forex Futures product is a major milestone development in the evolution of the Nigerian financial markets. The Futures market is an opportunity to transform risk into certainty – a major paradigm shift in the financial markets landscape.

“This innovation offers opportunities for government, businesses, pension fund administrators, investors and individuals among others to hedge (not speculate) to cope with exchange rate risk.

“It also affords the CBN a greater opportunity to manage exchange rate volatility, thus achieving greater market confidence, liquidity, improvement in business planning, job security, employment, better allocation of resources, global competitiveness of the Nigerian financial markets, and all in all, a thriving economy.”

To Chioke, the incorporation of a long-term diversified strategy in fiscal policy is required to cushion shocks in various segments of the economy.

He said the persistent pressure on the naira could have been minimised if a counter fiscal policy had been developed, as the CBN cannot continue to defend the naira with foreign reserves.

“To reduce this pressure, an inward looking policy (tax incentives, infrastructure development and production subsidy) should be emphasised to reduce the dependence on imported goods”, Chioke said.

Ezun said: “There is a limit to how far a policy can support naira. Demand for dollar is huge because the economy is import dependent. A lot of industries still depend on importation of raw materials and finished goods making our import bills to go up.”

Gwadabe said the country has not been able to build strong buffers, so that when crisis of this nature occurs, as seen in other countries, the economy would be protected.

He said: “The United Arab Emirates has over $400 billion in its reserves and that is a very big buffer for them as it protects their local currency at any given time and that is what I would want to see in Nigeria. Don’t forget that without the buffers, there is no way one can defend the local currency.

“As a Nigerian, anytime I see the gap increasing, I’m worried and I say that this gap has to be reduced. The rising gap between both markets is fueled by compromise. Nigeria is an economy where you see compromise. Speculators are the biggest challenge facing the naira.

“Don’t forget that speculation is on its own a business. Once the CBN follows one road, they will find a way to frustrate the policy and ensure the survival of their business.

“But, with increased transparency and liquidity, the activities of speculators will be reduced and volume of parallel market operators will also be reduced. We should move from the era of dollar allocation to think of how to bring in the dollars”.

The Managing Director of Financial Derivatives Company Limited, Bismarck Rewane, said in an on-line report: “From 1981 to 1985, during a similar period of control and oil shocks, relative prices did not adjust to restore internal and external balances. This led to low production, economic distortions, massive retrenchment, poverty and higher unemployment.

“In contrast, from 1986 to 1991, when the structural adjustment program was introduced, the exchange rate was flexible. Economic data showed that there was increased output, better employment figures and less poverty. Both periods had negative oil price shocks.

Rewane said: “Nigeria’s current managed floating exchange rate regime combines features of both the fixed and flexible exchange rate. A lightly managed floating exchange rate regime is advocated given that the exchange rate becomes determined essentially by demand and supply forces, while allowing the CBN to intervene occasionally to moderate excessive fluctuations, which are prone in developing countries such as Nigeria.”

Besides, other factors, such as terms of trade, inflation differential, public debt, current-account deficits, interest rates, political stability and the overall economic health determine the exchange rate of a currency.