In a recent analysis by global economist Dr. Kazeem Bello, he highlighted the inevitable plunge of the Naira and its struggle to find stability in what he refers to as the “death valley zone” (DVZ) in risk management terms.
According to him, the Naira’s journey through this zone is expected to lead to a forced reaction in the market due to the financial synergy expectations of various stakeholders, including market players, investors, users, and speculators.
Dr. Bello emphasizes that two key factors will determine the fate of the Naira in this critical period. The first factor is the possibility of a bearish demand, wherein users completely ignore the need for foreign exchange.
However, he asserts that this scenario is highly unlikely since demand for foreign currency will persist regardless of the exchange rate. The second option is for the Federal Government of Nigeria (FGN) to intervene by providing foreign exchange to support the Central Bank of Nigeria (CBN). Yet, Dr. Bello cautions that if not carefully managed, such intervention could inadvertently fuel market bullishness, leading to a prolonged period of high exchange rates.
The economist expresses concern over the downside effect of the hastily implemented market deregulation, which has contributed to the depreciation of the Naira. In Nigeria, economic quagmires often arise from price increases that fail to reverse due to policy misimplementation.
Dr. Bello argues that alternative strategies should have been explored by both the CBN and FGN prior to deregulation, which could have stabilized the market and mitigated the shock of uncontrollable rate increases.
Identifying two fundamental issues that plagued the Nigerian Forex market pre-deregulation, Dr. Bello proposes potential solutions. The first issue lies in the mismanagement of the market, which allowed for various manipulations such as illegal arbitrage, round-tripping, and unfair allocation to rent seekers. Addressing this problem requires a change in narrative, which falls within the purview of the FGN and CBN.
The second issue pertains to supply deficiencies and inflows into the Investors’ and Exporters’ (I&E) windows, which is a market-based challenge.
To tackle these problems, Dr. Bello suggests that resolving the mismanagement issue would help inject inflows into the market and alleviate the problem of inadequate supply. By monitoring market reactions to the changes implemented, investor confidence is expected to rise, leading to increased inflows.
At this juncture, the FGN can take two simultaneous actions: injecting substantial sums into the market to curb rate spikes and announcing a floating rate forex market regime to further deregulate market operations. This approach, according to Dr. Bello, would force the rate to remain bearish and weak, preventing any significant rise.
In conclusion, Dr. Bello acknowledges the challenging road ahead for the Naira and emphasizes the importance of monitoring the market closely. His analysis sheds light on the need for a comprehensive and strategic approach to stabilize the currency, highlighting the significance of addressing mismanagement, ensuring adequate supply, and implementing appropriate policies to regulate the market.
Dr. KAZEEM BELLO is PRINCIPAL PARTNER/CEO: AFRIQUE CAPITAL & EQUITY FUNDS ( New York & Abuja, Nigeria). He is a Global Development Economist; Corporate Banker; Finance & Private Equity Expert; Risk Manager; Financial Advisors; AML Specialist, and Project Manager.
