Why is the CBN selling dollars again?

Central Bank of Nigeria (CBN) Governor Godwin Emefiele recently had some choice words for the “faceless and criminally minded” people he blames for the naira’s weakness in the black market. Fresh from flooding a foreign exchange rate market he previously starved of dollars, Nigeria’s premier economist has set his sights on those he deems to be currency speculators. The change in mood is notable. Just last year, the CBN enlisted the help of the DSS to 'enforce' its foreign exchange policies. Why is the CBN suddenly so bullish? 

A brief sojourn into global oil market dynamics

To understand the CBN’s current position, we need to remember what happened in September 2016 when the Organisation of Petroleum Exporting Countries (OPEC) sanctioned a deal to cut its combined oil output in the first half of 2017. The big coup was that OPEC was able to convince large non-OPEC producers like Russia to make production cuts of their own. In total, the countries agreed to a cut of almost 2 million barrels a day and crucially, Nigeria was exempted from the deal as it recovered its own production.

The economic fallout of low global oil prices prompted the agreement. Russia has been in a recession for two years while Saudi Arabia’s budget deficit ballooned to nearly 12% of its GDP. Leading OPEC producers had struggled to respond to the rise of US shale oil from 2014, choosing to defend their market share rather than cut output to support prices, as they had done in the past. This year, they decided on a slight change in strategy. 

Paying the price for an over-dependence on oil

As oil prices crashed, Nigeria’s dollar earnings went in the same direction, putting the naira under severe pressure. Lower levels of dollar inflows made the dollar scarcer – and more valuable – compared to the naira. Moreover, given the country’s economic dependence on oil, investors fled with their capital, discouraged by bizarre foreign exchange policies as the CBN futilely attempted to defend the currency by rationing dollars. The result? A full-blown currency crisis and, added to a rout in oil production due to increased militancy in the Niger Delta, Nigeria’s first full-year recession since the Babangida era.

This diagnosis of Nigeria's economic woes may strike some as deceptively simple, but it just shows how important oil prices are to the country. And from this, we understand why Emefiele is so confident: the deal has generally lifted prices. Till recent, global oil prices were on the uptrend. As a result, more dollars have flowed into CBN accounts. Reported dollar reserves have now grown from $24 billion in October to $30 billion in March. Meanwhile, the Federal Government was confident enough to base a larger share of its 2017 revenues on oil. 

So despite the cries of a diversified economy, the impact of a single deal is significant. But love or loathe the CBN, their move to improve dollar liquidity is a necessary (albeit delayed) step towards economic recovery.

Many Nigerian manufacturers require steady foreign exchange flows to purchase imported raw materials especially as the prices of domestic substitutes have risen in response to higher demand. The performance of the 2017 Federal Budget will also depend on how much revenue the government generates. The budget benchmark is $44.50/bbl, and prices should remain above this level for most of the year. The real economy is also affected as indigenous Oil & Gas companies are responsible for a large chunk of the non-performing loans floating around Nigeria’s banking system. Finally, international appetite for Nigerian investment is closely linked to oil price movement.

Together, all this makes crude oil price – and production – the most important parameter for Nigeria's economic recovery. 

Will favourable oil prices last?

But in keeping with the rollercoaster ride of the previous three years, these higher oil prices may not last. Markets shook recently when the price of North American crude benchmark West Texas Intermediate sunk below $50/bbl for the first time in 2017. Shale producers have ramped up production faster than many expected. These pesky producers are now on course to increase their output for the year by more than markets bargained for. Not to mention the enormous backlog of oil stockpiles in the developed world built up after many years of oil over-supply in the market.

All of that is bad news for Nigeria. Amid this, OPEC nations have managed to surprise markets once again by adhering strictly to the terms of the deal, on occasion even cutting more than initially pledged. By all accounts, they have done their part. But with so many wildcard countries involved, question marks remain over the sustainability of the deal and whether it will be renewed beyond June. Initial exuberance has given way to doubt. But should we be surprised? We already know it is foolhardy to predicate economic success on oil.

In the context of the 2014 crash, recent price movements are negligible, but the volatility will not suit Nigeria. Particularly while we struggle to get oil production back to the target level of 2.2 million barrels a day.

For the CBN, a relapse in oil earnings will put it in an awkward position – and give erstwhile speculators a boost. Leading officials pledged to eliminate the black market, but Emefiele may soon be worried that he is running out of gunpowder. 

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