Supporting a “undervalued” naira is “necessary”: Rewane clarifies the comment of Naira’s defense

The economist, Bismark Rewane, has supported the currency policies of the Central Bank of Nigeria (CBN), indicating that it is necessary to support an undervalued currency.

Mr. Rewane made this comment after his comments on Channels TV, where he said that the Nigerian government had spent on $ 8 billion to support La Naira against the dollar.

Speaking on Arise TV, he clarified his statements, while criticizing the commentators of social networks who, in his opinion, had misunderstood their comments due to ignorance.

He stressed that monetary defense is a central mandate of the Apex Bank and that supporting Naira when it is perceived that it is undervalued is a good economic decision.

According to him, defending an overvalued currency would be a bad policy choice. He also cited examples of countries that have defended their coins in similar circumstances.
Rewane declared that Naira is undervalued in approximately 26.35%, which makes it logical that the CBN intervenes to correct market misalignment.
He also praised CBN’s currency policies, stating that his efforts to stabilize Naira have been effective.

What Rewane says

About the fair value of the Naira

“Using a purchasing power parity analysis (PPP), the fair value of the Naira is ₦ 1.102.15 per dollar. Currently, Naira is low value at 26.35%.

This distinction is important:

If you intervene to protect an overvalued currency, create an artificial demand, which is a bad policy.
If you intervene to support an undervalued currency, you are correcting a misalignment of the market.

The recent CBN actions align with the latter. The Naira had significantly misaligned, and when taking deliberate measures to stabilize it, the CBN is addressing that problem. “

In the steps, the CBN has taken to stabilize the naira

“Previously, Nigeria operated a several level exchange rate system, with different market segments that work independently. This created a monopoly that discriminates the price, where the CBN sold Forex to a rate, while some entities resorted to a different rate.

In an attempt to liberalize and increase transparency, the CBN has taken measures to guarantee:

A unified exchange rate system
Clearer prices mechanisms
Reduced activities of speculation and arbitration

These efforts have contributed a degree of market stability. “

About how we get here

“To understand what is happening today, we must reflect on this era last year.

At the beginning of 2023, the CBN increased interest rates by 400 basic points, marking its first significant intervention in years.
This led to a strong appreciation of the Naira, which briefly strengthened ₦ 1,009/$ 1 before increasing to ₦ 1,200/$ 1 due to market distortions.

However, the CBN did not implement a structured intervention plan. Instead, it made a single Forex auction worth $ 1.8 billion, without a clear monitoring strategy.

This time, however, the CBN has adopted a more systematic approach to intervention. “

In the use of Forex of the CBN

“Let’s examine currency entries during this period:

Foreign portfolio investors: $ 10 billion (30% of the total)

Export gains: $ 8.25 billion

CBN tickets: $ 3.7 billion

Corporate entries: $ 9.7 billion

Total: $ 31 billion

How was this money used?

Liquidation of foreign portfolio tickets: $ 5.5 billion

Import payments: $ 12.8 billion

CBN outputs for obligations: $ 2.4 billion

Corporate Departure: $ 9.1 billion

In addition, the CBEN cleared the IATA funds of the outstanding airline and settled forward.

The key conclusion is that these interventions were structured and destined to restore confidence in the currency market. “

In the parallel drawing with 2024

“Looking at the exchange rate trajectory in 2024, we see a family pattern:

The Naira depreciated sharply, falling to approximately ₦ 1,625/$ 1.
Then he recovered around ₦ 1,125/$ 1 before adjusting to ₦ 1,505/$ 1.

For investors, stability is more critical than absolute value. A stable exchange rate encourages business confidence and investor confidence. “

When comparing Nigeria with other countries that have defended their coins

“The Margaret Thatcher government once spent $ 27 billion trying to defend the British pound. However, George Soros aggressively shorten the currency, obtained $ 10 billion in profits and forced the Bank of England to leave his defense.

A similar situation occurred in Malaysia under Prime Minister Mahathir Mohamad, when Soros attacked the Malaysian coin. Although Mahathir resisted, the currency continued to depreciate.

China, between 2015 and 2016, spent $ 1.02 billion to stabilize its currency.
Russia, during the 2014-2015 crisis, used $ 80 billion for the same purpose.
Switzerland, between 2011 and 2015, spent $ 480 billion defending the Swiss Franco.
Japan, in recent years, has intervened with $ 135 billion to support YEN.

In comparison, the intervention of $ 8 billion of Nigeria is relatively small. The key difference is that Nigeria is supporting an undervalued currency, not overvalued. Historically, countries that defend overvalued coins suffered speculative attacks that presented their weaknesses. However, Nigeria’s intervention is necessary because Naira is quoted below its fair value. “

About why it is the CBN mandate to defend the naira

“It is the main mandate of the CBN defending, supporting and stabilizing the Naira. That is exactly what they are doing. Misrepresenting this policy would be unfair for both the objectives of the government and for the commendable efforts of the Central Bank.

The title of our last presentation was “the resolved position of the Central Bank”. Just use the word ‘solved’ for a good cause, not a bad one.

The CBN has remained firm and has not rushed to reduce interest rates. As Governor Cardoso rightly pointed out:

“A data point is not a trend.”

I appreciate the opportunity to clarify erroneous concepts and provide a perspective on these policies. The evidence shows that the CBN strategy is working, and its actions must be supported. “

In the speculation and erroneous information of social networks

“Recently, there has been a wave of erroneous information on social networks about Naira and CBN policies. Much of this comes from ignorance, but some are misrepresents deliberate by influential people and commentators who misunderstand market dynamics.

Unfortunately, economic policy is often seen through a political lens, which hinders rational discussions. But as James Carville said:

“It’s the economy, stupid.”

At the end of the day, what matters is whether these policies are working. ”

On whether CBN policies are working

“In our humble opinion, policies are working. The CBN has taken structured measures to address the distortions of the Forex market, restore investor confidence and stabilize the Naira.

While the challenges remain, it is important to evaluate economic policies based on data and market foundations instead of speculation and political noise. “

Why does this matter

Rewane’s comments have caused a storm of social networks, with government supporters and opposition figures taking advantage of their comments to boost their narratives.

What was destined to be an economic analysis quickly became a political battlefield, with accusations, bad interpretations and selective sound phrases that dominate the conversation.