Forex intervention not sustainable, says don
A Don and Professor of Financial Economics in the University of Uyo, Awka Ibom State, Leo Ukpong, has warned that the Naira stands the risk of getting worse if Nigeria’s External Reserves are depleted.
Ukpong, who is also the Dean of the institution’s Business Administration Faculty, advised that the forex exchange (forex) reserves should be channelled towards economic activities that create values in the domestic economy, such as increasing values of the manufacturing capacities of firms; increasing exports, decreasing imports, and capable of generating sustainable employment in the domestic economy.
He warned that subsidising the naira for holiday travels, religious trips, and payment of foreign school fees, outward medical tourism, purchase of imported refined petroleum products, and importation of machine parts, would not help the naira to sustain its appreciation over the long run.
“Obviously, if the nation’s dollar reserve is reduced to a critically low level, the Naira will certainly take a beating in the market. In other words, naira will come under strong pressure to depreciate,” he warned.
Ukpong explained that the intervention in the forex market by the Central Bank of Nigeria (CBN) is carried out to either strengthen or weaken the value of naira vis-à-vis other currencies of the country’s major trading partners. The recent direct intervention by increasing the supply (sale) of dollars by the apex bank is aimed at shoring up the value of naira.
“Over the past seven weeks, CBN has successfully raised the value of Naira from approximately N510/$ to N390/$ (between February 22, 2017 and April 3, 2017), an approximately 24.27 per cent appreciation of the Naira against the US dollars. Clearly the implication of such direct intervention by CBN on the foreign exchange market is increased supply of US dollars (appreciation of the naira) in the short term,” Ukpong noted.
But financial experts are concerned about the sustainability of the interventions. He explained that the sustainability of this exercise depends on the rate of forex inflows and outflows. Noting that over February and March, Nigeria’s foreign exchange reserve increased from $29.61 billion to 30.30 billion, representing a 2.33 per cent monthly increase.
Based on such net inflow trend, he said the country might be able to sustain such intervention being done by the CBN.
“However, based on our long term historical trend, the net impact will be negative on the reserve,” he warned.