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With Nigeria’s foreign reserves below $39 billion and likely to fall further, all bets are off, making devaluation at the next Monetary Policy Committee (MPC) meeting presided over by Sarah Alade, interim governor of the Central Bank of Nigeria (CBN), potentially unavoidable, BusinessDay investigations have shown.
Also, the continued pressure on the naira and growing effects of the Quantitative Easing tapering by the United States of America, with its attendant foreign direct inflow reversal, are some of the compelling reasons for likely movement of the mid-point of the currency rate higher and increase in the cash reserve ratio (CRR) at the meeting to protect the reserve and possibly attract further FPI flows.
But some analysts say that oil theft and theft of oil money must abate, while reserves must accrete for these to be achieved on a sustainable basis.
“A neutral monetary stance and policy rate decision would, however, probably compound upside risks to $/N,” says Samir Gadio, emerging markets strategist at Standard Bank, London. “It would also reinforce the perception that Nigeria is increasingly behind the curve, in terms of monetary tightening vs emerging market peers, following a series of hikes in policy rates which in most cases took place to support the exchange rate and boost the incentive to hold local assets.”
The analysts further argue that Alade’s dilemma stems from the fact that her tenure may be too short to make an impact, but long enough to stabilise things if revenues improve and leakages stop, adding that it will amount to a thankless job should all the negative indicators persist throughout her short tenure. Besides, they argue that monetary policy options are increasingly becoming narrow and choices are harder.
Alade had told international investors on a conference call organised by Citi London recently that though Open Market Operations (OMO) would have been the CBN’s preferred monetary policy tool, CRR turned out to be the most effective, promising that the regulator would not hesitate to increase it if necessary.
The scenario as presented by some analysts is that the MPC would increase MPR to 13 percent, private sector CRR might be moved from 12 to 15 percent, and public sector CRR moved to 100 percent, while providing an option to increase liquidity ratio in May when she would be having the last shot as presiding officer. This is expected to stabilise the naira, with reserves depletion slowing down.
Another option will be allowing the naira to slide by N5 or 3 percent to N162 official rate, increasing public sector CRR to 100 percent, with possible outcome of creating convergence of exchange rate at N169/$ at both the parallel and interbank markets.
“In all cases, if the oil revenue leakage is not addressed, the naira pressure will resume later,” says Bismarck Rewane, chief executive of Financial Derivatives Company.
But analysts at Renaissance Capital (Rencap) say given that Alade is in essence a caretaker governor until June, they do not expect her to make any major policy moves at the next MPC meeting.
“We think there is a small risk of a devaluation of the naira in March, partly because Alade said in January that she would support a review of the mid-point of the exchange rate band (currently NGN155/$). This would help stabilise the market, in our view, assuming the exchange rate target band adjustment met the market’s expectation,” they add.
Speaking further, Gadio says, “Nevertheless, drastic steps will be required to stop or slow the erosion of FX reserves and restore confidence in the Nigerian market. In our view, a sharp tightening in monetary and liquidity conditions is urgently required if the CBN wants to effectively protect current USD/NGN levels and slow the erosion of FX reserves.”
According to him, given the heightened uncertainty in the FX market, yields at the short end will have to back up further to compensate international investors for the prospective risk of naira depreciation.
“A hike in the MPR would be useful since it would automatically push up the SDF rate which is the natural floor for the 91-d T-bill yield; this will have to be combined with CRR and OMO-related measures to curb excess liquidity in the system. Ironically, even if the exchange rate were to be eventually devalued, this would still have to be associated with a subsequent move higher in yields to restore some sort of market stability,” Gadio reasons.
Afrinvest analysts, while acknowledging the fact that some banks exposed to some distribution companies (Discos) are jittery over the continued pressure on the naira against other currencies, point out, however, that the naira has so far lost 0.03 percent and 4.0 percent at the CBN and the interbank YTD. “Though the concerns of banks are germane, the primary concern that could surmount pressure on the cash flows of investors is the decision by the CBN to officially devalue the currency. We don’t foresee devaluation as a viable alternative at the moment, considering the significant downsides this might have on the entire economy,” they say.
John Omachonu
