Mid-last week, the naira’s exchange rate saw more movement in one day than it has experienced in any 24-hour period in the last 5 years.
There was some element of surprise in the fact that the naira appreciated so rapidly without being preceded by changes in the “fundamentals” of the economy. In fact, given the transient fillip to oil prices following Saudi Arabia and Russia’s quasi-agreement earlier in the month to lock in production at January output levels, it would have made sense if this recovery in the naira’s value happened in the immediate aftermath of that deal.
Far more surprising, though, has been the absence of a coherent post-event explanation for the naira’s sudden turn of good fortune. Most accounts of the cause of the naira’s appreciation, in the market (forgive the pun), ranged from the downright silly (markets succumbing to Ifeanyi Uba’s threat to intervene in the naira’s favour, if only he has the appropriate authorisation), to the purely speculative. In the latter case, depending on who you listened to, between the CBN and the NLNG, some party had surreptitiously intervened (supplying the market with enough dollars) to trigger the inter-day ructions in price.
To be fair, this being Nigeria, there were the phantasmal narratives. For instance, I heard people describe a market finally persuaded of the president’s commitment to stick to the naira’s official exchange rate. And accordingly, the naira’s price rise was the result of “speculators” exiting the markets profitably.
Whatever the choice of explanations, one result of the developments last week was to discredit the markets as an alternative to the Central Bank of Nigeria’s (CBN) managed float of the naira. In markets, prices are just as likely to move away from the value of underlying assets — this happens a lot in the derivatives markets; and to shares of companies about the competence of whose management the market has doubts — as they are to reflect the balance of supply and demand. But, more frustrating, a market roiled by “animal spirits” as doubtless the local exchange rate market has been since the monetary authority tied one hand behind its back as it entered the pit to fight for the naira’s life, is unlikely to be rational.
However, to argue against the market because of a set of arbitrary developments (in all likelihood a one-off intervention on Wednesday that saw more dollars introduced into the market than has been the quotidian trend since the year began) is to substitute a subjective randomness for a more objective one. In this instance, the arbitrary development on the back of which the naira appreciated may be no more supportable than we have been able to explain it.
Yet, the fact remains that the price of the naira would ultimately be determined by how much people want to hold value in that currency. It would matter that the economy underlying the currency is “healthy” (arguable in Nigeria’s case), and that managers of the economy are alive to its needs (a point still moot almost a year into the “new” administration). Markets also like to be able to anticipate developments (in order to work these into their models), which explains the practice in the corporate sector of organising road shows and issuing quarterly financial performance guidance.
Thus, not just were the events in the exchange rate market on Wednesday unsustainable (whatever the drivers they are unlikely to be easily replicated with any regularity). They most likely hurt the smooth functioning of the market — by introducing a new, and as yet understood, source of volatility.
The naira has since resumed its migration southwards in response to the domestic economy’s unseasonably cold winter. The task before its minders is to render this transition more transparent, if not easier.
