Leadership (Abuja)
Jerry Uwah
6 January 2009
analysis
Chukwuma Soludo, the governor of the Central Bank of Nigeria (CBN), is probably the luckiest Nigerian to manage the bankers' bank in the world's most populous black nation. He became governor at a time when the naira had plunged to N128 to the dollar in the official market while the exchange rate at the parallel market was anything from N140. The naira appreciated to N116.50 to the dollar under Soludo's watch. It could have appreciated higher if the apex bank had removed some of the artificial obstacles on the way of the Nigerian currency as oil prices surged up.
Abdulkadir Ahmed, as governor of the CBN, had the misfortune of presiding over the historic devaluation of the naira from N1 to the dollar to a record N80 to the dollar. History imposed devaluation on him because he came to the scene at a time when tumbling oil prices compelled Nigeria to adopt a market economy to reduce government subsidy on a number of things. The tenure of Paul Ogwuma as CBN governor was basically that of stagnation.
Joseph Sanusi was not as unlucky as Ahmed. He came to office when oil prices, the mainstay of Nigeria's one-handed economy, started inching up. Though things had started looking up at that time, the former managing director of First Bank, arguably Nigeria's strongest and most efficient bank, had a Herculean task managing the exchange rate of the naira because the foreign exchange market at that time was basically a seller's market with the apex bank being the net supplier. The official exchange rate of the naira slipped to N128 to the dollar under his watch.
Sanusi's predicament came with the frontal assault he had with some of his former colleagues who were so powerfully connected to the corridors of power that they were considered sacred cows. These men were behind the massive fraud perpetrated by banks in the foreign exchange market. At the heat of the battle, 21 of the nation's 89 banks were caught on the wrong side of the forex law. Without batting an eyelid, Sanusi forced two hitherto untouchables in the industry into compulsory retirement for flouting foreign exchange regulations.
Soludo has been lucky because he became CBN governor at a time when oil prices were surging up. Besides, by the time he took over from Sanusi, the no-nonsense former CBN governor had so terrorised the forex market that only a mad man in the banking system would openly embark on forex round-tripping. Management of the exchange rate of the naira was, therefore, not a Herculean task for Soludo. In fact, it was not high on his list of priorities. Somewhere in the middle of his tenure, forex inflow into the economy became so unprecedentedly large that banks did not even remember to ask the CBN for the precious paper. Hedge funds were flooding the capital market from all parts of the world, making the official forex market pale into insignificance.
During Sanusi's last days in office, most of the apex bank's directives to the banking industry were on forex transactions. On the contrary, the forex market, during the middle of Soludo's tenure, had become a buyer's market. The avalanche of directives from the apex bank setting the code of conduct in the forex market virtually evaporated.
As a buyers' market, there was not much money to be made in the forex market, so banks shifted their mischief and sharp practices to the capital market where they had succeeded in creating an artificial scarcity of some stocks through scandalous manipulation of share prices.
Though not a regulator of the capital market, the CBN, at a certain point, issued more directives to banks on their conduct in the capital market than in the foreign exchange market.
Today, all that has changed. Banks, with the active connivance of stockbrokers, have run the capital market aground on the watch of a derelict Securities and Exchange Commission (SEC) as regulator. While banks count their losses in the capital market meltdown, they have now returned to the forex market where the tumbling oil price and the global financial credit crunch of tsunamic proportions have conspired to constrict forex inflow and return the market to sellers.
Ironically, the CBN under Soludo had always boasted that its prudent management of the forex market was responsible for the relative stability of the exchange rate of the naira in the last three years. Events of the last eight weeks seem to controvert that stand. In fact, it could be argued that the massive inflow of forex engendered by surging oil prices and the boom in the capital market, where most banks' sharp practices were diverted to, were responsible for the seeming stability of the exchange rate of the naira. Now that there is no more money to make in the capital market and a sudden scarcity of forex has drawn banks' attention back to the forex market, this is the period when CBN's dexterity in foreign exchange management would face the real litmus test.
Like Sanusi, the CBN must prove to banks that political connections would not determine who gets punished for flouting foreign exchange regulations in the next few months. Once banks are convinced that their mentors in the corridors of power could compel the CBN to look the other way while they engage in forex round-tripping, the naira would trade for N180 to the dollar before the second quarter of this year.
The apex bank took the unprecedented step of shutting down the forex market as early as December 19 when demand for forex was at its peak, and would not open it until January 5, 2009, apparently due to scarcity. The hot scramble for forex by people itching to travel out of the country for the end-of- year celebrations pushed the exchange rate of the naira in the parallel market on Tuesday, December 30, 2008, to an unprecedented N150 to the dollar before it glided down again two days later. The spate of demand triggered by an odd combination of stampeded capital flight and speculative bidding by banks now cashing in on the scarcity to make fast gains has seen the apex bank drawing down the nation's hitherto buoyant foreign reserves by a record $10 billion between October and the middle of December 2008.
The unfortunate development in October 2008 was apparently engendered by the sudden recalling of $3 billion by foreign banks serving as correspondent banks to their counterparts in Nigeria. They needed the money to cushion the effect of the asphyxiating credit crunch in their home countries. Demand for forex suddenly surged from a monthly average of $300 million to $3.4 billion in October. Ironically, that is the fallout of the global credit crunch which Soludo said Nigerian banks were cushioned against.
With the banks gasping for forex as their independent sources of supply dried up and the apex bank's source of forex inflow dwindling with tumbling oil prices, the demand for forex can only escalate since the apex bank is now the sole supplier of foreign exchange to the system. And with the twin evil comes banks' sharp practices which the Soludo regime in the apex bank may be ill-equipped to curtail, having gone through almost half a decade of free flow of forex and during which period there was a measure of laxity on the enforcement of regulations in the market.
The apex bank's arsenal in the war against the tumbling value of the naira does not seem to boast sophisticated weapons in its inventory. The CBN has a penchant for tackling forex problems from the demand side since it lacks the financial muscle to stimulate supply at lean times like this. All the directives churned out to banks in the eight weeks since the flurry of demand depleted CBN's budget for the forex market in 2008 have been designed to choke out demand. No one is talking about how to boost supply. The demand side approach is, at the moment, the only weapon at its disposal. It has already been stampeded into clamping down on the percentage of shareholders' fund that banks could deploy in the forex market. Since it has reduced that from 20 to 10 per cent to curtail the amount of naira chasing the few dollars in the market, industry watchers are worried that any further curb could inhibit banks' ability to finance imports. Perhaps, the most effective weapon in the demand side approach to a stable naira is to enforce strict compliance with rules governing the use of forex. Soludo would have to convince the world that he can wield the big stick the way Sanusi did.
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If Soludo is smart, he should resign now from this visionless administration b4 Emperor Yar puts all the blame on Soludo as yar is famous for - Ribadu, Kingigbe, Permanent Secretary for Education and the list goes on...