SAT, MARCH 14 2020-theG&BJournal-That is what is currently playing out in the Nigeria FX market.
One of the pioneers in the theory of rational expectations Thomas J. Sargent writes: The theory of rational expectations was first proposed by John F. Muth of Indiana University in the early 1960s. He used the term to describe the many economic situations in which the outcome depends partly on what people expect to happen.
As an example, the value of a currency and its rate of depreciation depend partly on what people expect that rate of depreciation to be. That is because people rush to desert a currency that they expect to lose value, thereby contributing to its loss in value. Similarly, the price of a stock or bond depends partly on what prospective buyers and sellers believe it will be in the future.
The currency came under intense pressure during the week, weakening by 0.6% w/w to NGN368.47/USD at the I&E window and by 5.3% to NGN380.00/USD in the parallel market.
In the Forwards market, the naira depreciated across the 1-month (-2.1% to NGN377.49/USD), 3-month (-2.5% to NGN384.45/USD), 6-month (-2.9% to NGN396.67/USD) and 1-year (-3.8% to NGN427.08/USD) contracts.
At some stage, currency watchers were predicting a quick devaluation of the naira. The Central Bank of Nigeria (CBN) Governor, Godwin Emefiele Thursday said that is not going to happen.
He quickly put out a press release suggesting the ills of the naira was man-made, by currency speculators and then told the world that the apex bank has begun a robust and coordinated investigation in collaboration with the Nigerian Financial Intelligence Unit (NFIU) and related agencies ‘’to uncover the unscrupulous persons and FX dealers who are creating this panic, and the full weight of our rules and regulations will be meted out to them, including but not limited to, being charged for economic sabotage.’’
Here is our take: First, what does the CBN hope to achieve with this statement? Anybody with a minimum exposure to O’Level Economics could have predicted the rapid fall in the exchange rate of the Naira to the US$. It’s a disaster foretold.
Perhaps, the CBN should get the officers of NFIU to go and study the theory of Rational Expectations.
When the CBN busied itself panel beating interest rate to force it down to single digit whilst inflation remained at double digits, what you get is a hurried migration to safer assets that protect value of wealth. Period.
When a gilt-edged instrument like the Treasury Bill rate was forced down to 3% whilst riskier bank deposits rates are higher and both are below inflation rate resulting in negative yields, should they not have anticipated that there would be an expansion in demand for US$ in cash and other dollar-denominated instruments, all of which respond to elementary demand and supply laws?
Is the CBN not aware that the market is aware that the Excess Crude Account has been depleted to just $71m from the billions of dollars that used to be in that account?
Are they not aware that the market is aware that not only has crude oil price dropped precipitously to less than 60% of the budget benchmark, but that Nigeria is unable to sell her cargoes, all of which imply that inflow of foreign exchange to government coffers is severely constrained?
Are they not aware that stock markets around the world have tanked and so has Nigeria’s?
The Press Release was just a dumb public relations gambit.
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