[Case heightens for naira rate adjustment] Proponents of the devaluation of the national currency say options are narrowing for the Central Bank of Nigeria (CBN) after the country’s foreign reserves plunged below the psychological level of $40 billion amidst fresh reports suggesting that importers were bringing forward their dollar purchase and exacerbating the market panic. The next meeting of the Monetary Policy Committee (MPC) will hold on March 24 and 25 and many analysts are now banking on a movement in the naira rate band to an upper limit of N165 to the dollar. The analysts also expect a movement of the Cash Reserve Ratio (CRR) to 100 percent from the current 75 percent as the apex bank continues its battle to stem the demand pressure on the dollar. “The options for the naira are narrowing and the choices are getting harder for the CBN,” one senior economist said yesterday, pointing to the fact that there was no longer headroom for the CBN to use the interest rate tool given that interest rates have climbed close to their peak in Nigeria. The currency is trading at around N165 to the dollar on the interbank and N171.5 on the parallel market as importers aim to purchase their dollar requirements for the months of April and May. The recently released allocation for the importation of refined petroleum for marketers by the Petroleum Products Pricing Regulatory Agency (PPPRA) may also spike dollar demand, analysts say. Demand for foreign exchange spiked to a record $3.1 billion in February, with the Excess Crude Account (ECA) ebbing further to a mere $2.5 billion, despite the Ministry of Finance boasting a year ago that it would be no less than $10 billion by year-end. Although international oil prices soared last month to an average $110 per barrel, February may turn out to be the worst month yet for the naira as well as foreign flows into Nigeria. Reports say as much as $2 billion was taken out of the country as foreign portfolio managers flee emerging markets for the United States, where authorities have continued with the tapering of the quantitative easing programme that helped fuel flow of cheap The reversal in foreign portfolio investments (FPI) accompanied by massive revenue leakages meant that rather than use the higher oil prices to expand its foreign reserves, Nigeria actually suffered a significant haemorrhage in reserves because of the net outflows. According to Razia Khan, analyst at Standard Chartered Bank, “At some point the authorities will have to replenish reserves through the accumulation of greater fiscal surpluses and build up the ECA, or they will have to change strategy on the FX rate and stop selling reserves to support the current level of FX rate.” She adds that given that the foreign reserves have fallen below the psychological point of $40 billion, it will now be increasingly difficult to instil confidence in the sustainability of the current exchange rate. However, there is a huge political price to be paid and it is unclear if the acting governor of the apex bank, Sarah Alade, is prepared to pay that price in a hugely critical election year. “The depreciation in the naira is now an involuntary move compelled by market reality rather than a false sense of economic patriotism, but it will have profound consequences,” says Bismarck Rewane, CEO, Financial Derivatives Company. The government has typically pandered to the appetite of Nigerians for cheap dollars in an import-dependent country where government has consistently failed to deliver democracy dividends to the electorate. One political fallout could be demand by the people for answers to why the nation’s oil industry continues to underperform its peers, earning less from crude oil exports at a time all other nations are ramping up their own oil revenues through boosting production and export to take advantage of high international oil prices. Nigeria’s international partners, the IOCs, have all reduced their investment in the country, blaming outdated policies, the lack of incentives and high handedness by the Ministry of Petroleum and the Nigerian National Petroleum Corporation.
Posted on: Thu, 06 Mar 2014 09:46:04 +0000
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