Dr Ayo Salami, CIO Duet Asset Management recently granted an interview to CNBC Africa expressing his views on CBN’s decision to float the naira in a bid to attract foreign investors into the country.
How CBN lost its credibility
Monetary policy for a period of time took an unorthodox approach for the whole of last year (2015), until the middle of this year when the central bank decided to raise rates and also to free the exchange rates. Before then, the Central Bank has adopted an extremely unorthodox approach to monetary policy. Beginning from about January last year, the Central Bank of Nigeria (CBN) lost its credibility with foreign investors which is now being rebuilt with the recent decisions of the CBN to raise policy rates and allow the naira to float. Some orthodoxy is coming back into CBN policies.
CBN still does not understand the dynamics of the market.
At the heart of the current challenge for an external investor is the feeling that the Central Bank does not really understand the dynamics or the drivers of the interbank market. If I do normal evaluation of the Nigeria exchange rate, I will agree that the naira is undervalued at current levels. But the current valuation of the naira is driven by sentiments rather than by fundamentals. And the way that an external investor looks at it is that the CBN is sitting on $25 billion of external reserves. The economy is screaming for dollars. Now the CBN is trying to attract dollars to Nigeria without using its own liquidity to support that interbank market. And for me as foreign investor, I am saying, if the CBN is not selling its own dollar to Nigerian banks, why would I bring my own dollars into Nigeria.
How foreign investors read the market
So that is the fundamental question. If the CBN is holding onto its dollars and refusing to supply the interbank market with liquidity, foreign investors will read that as a signal that the CBN thinks that the naira is overvalued because if the CBN believes at N340, or at N330, the naira is undervalued, it should sell dollars into that interbank market. It is when, as foreign investors, we see the CBN supplying liquidity that is when foreign capital will follow. And until that happens, this attempt to lure foreign investors by lowering the exchange rate will not work because it is a sentiment driven dynamics.
Ban on 8 banks from interbank market
Foreign investors view the decision to suspend nine banks as negative. The suspension of the nine banks signifies that banks have a dollar liquidity problem on their balance sheet. It shows that banks have a critical challenge with dollar liquidity enough to make them unable to remit dollar obligations to the CBN. This indicates that the challenge is not going away anytime soon.
If all the banks have to go and source US$2.3 billion and return to the Central Bank within days, the implication is that they have to go and look for this money from the interbank market which will put further pressure on the naira. This means that the naira will only have to go one way, and that is depreciate.
