A former Deputy Governor of the Central Bank of Nigeria (CBN), Prof. Kingsley Moghalu, has explained how currency speculators have been deliberately attacking naira, contributing to its free fall in recent years.
Moghalu stated that some forex traders are using speculative currency to tap profits from the exchange rate.
The former Deputy Governor of CBN said this while reacting to the recent downfall of naira against dollar.
The CBN Governor, Mr Godwin Emefiele had on Friday threatened to track the owner of AbokiFX, a website that collates black market exchange rates in Nigeria, over illegal activities that undermine the country’s economy.
The CBN governor had said that the owner of AbokiFX, Oniwinde Adedotun is using the website to manipulate parallel rates.
However, the abokiFX management had since debunked the CBN claims, saying all allegations towards it’s director were not confirmed. In another move, the AbokiFX said on Friday that it would no longer provide daily updates on foreign exchange rates for now and hoped that the naira would stabilise.
Reacting to the situation, Moghalu, explained there are numerous factors affecting the value of naira, among which he said is currency speculation.
Although the former deputy governor did not specifically mention AbokiFX, he explained that forex traders in the country are taking advantage of the economy situation of the country to make profit.
According to him, the country is being exposed to such attacks because of the insufficient foreign reserves.
Moghalu made this known in a series of tweets on his official Twitter handle.
The tweet reads, “Speculation also affects the naira value, as there are currency traders around the world for whom the weakness of a currency is their very good fortune.
Such traders “attack” such currencies for profit, especially where the currency is using a fixed, official exchange rate determined by the Central Bank instead of the market.
“As the Naira is effectively pegged officially to a “reserve” currency (dollars, euros, pound sterling), speculators can attack such a currency for profit if the country (Nigeria in this case) is perceived to have insufficient foreign reserves to meet demand.
“Because our inflation rates at 17 per cent are way higher than those “reserve-currency” countries, again we are exposed to possible currency attacks.
“Such traders will borrow the Naira from Nigerian banks, convert it to, say, dollars, then buy short-interest paying Nigerian bonds. If, as the speculators anticipate, the Central Bank devalues the naira, the traders sell the bonds in the foreign currency, convert them into naira, and repay their original loan. The steeper the devaluation, the higher the speculator’s profit.”
Proffering solutions, he said, “What should we do about all of this? As I have said before, and say again, we have two options. One is to let the naira find its level in the market. In other words, subsidise the currency.
“While there will likely be an immediate spike in the price of the dollar, this move will have two advantages. The first is that, because Nigeria has a big, profitable economy and market, dollars will likely swamp the market seeking profits for investors.
“When this happens, the laws of demand and supply will work in favour of the naira. Alongside this, maintaining different exchange rates for different kinds of transactions must end. This is called rate convergence.
“The second, and more important benefit is that, since the current practice of the CBN pumping dollars in the FX market (from the reserves, which also depleted them) is essentially a subsidy for imports, which has made Nigeria more and more import-dependent, letting go of the subsidy on the naira will refocus the economy towards exports.
“This will create an incentive for complex production of a quality that can be competitive in the international market. Accompanying this must be the right trade policies to support and create such incentives for massive exports of finished, value-added goods from Nigeria.”