The outlook for naira dimmed yesterday as analysts anticipate pressure on the local currency in the medium term due to falling oil prices amid sustained demand for U.S. dollars by end users.
Naira eased one percent to 370 per dollar on the black market on Thursday, traders said, citing a shortage of dollars.
The price of crude oil (Bonny Light) dropped by 7.76 percent to $59.19/barrel yesterday from as high as $86.29/barrel in October 2018, according to Bloomberg data.
“I think the pressure is linked to the oil price outlook because the moderation of oil prices is an indication of reduced Foreign Exchange (FX) inflow for Nigeria in terms of export earnings and that will have further negative impact on FX reserves,” Ibrahim Tajudeen, Head of Research, Chapel Hill Denham, said.
READ ALSO: Oil slides again over doubts OPEC can avert glut
Lukman Otunuga, a research analyst with ForexTimes Nigeria said that the Naira may struggle to reap the full benefits of a weakening dollar due to heavily depressed oil prices.
“With oil prices sinking to a fresh yearly low, this not only impacts government revenues, but economic growth and the nation’s ability to enact the 2019 budget which pegged the Oil price at $60 per barrel,” Otunuga said by mail.Set featured image
The research analyst at Forex Times Nigeria noted if falling reserves result in the CBN being unable to defend the Naira, it will weigh heavily on the local currency.
Johnson Chukwu, CEO at Cowry Asset Management Limited supported the view that the drop in crude oil price is having a negative impact on the naira.
“It implies that foreign reserves will come under pressure .So you are seeing elevated demand for FX from people who want to meet their obligations,” Chukwu told BusinessDay by Phone.
Keeping the naira as strong as possible against the dollar is popular in Nigeria, which imports the bulk of its needs from other countries. That has been a priority for most central bank governors whose fixation on exchange rate stability is also in recognition of its impact on price stability, a core mandate of any central bank.
With two currency devaluations under his belt, the current Central Bank Governor, Godwin Emefiele, is prepared to fight off another naira depreciation in the months leading up to the general elections in February 2019 even though the rate of foreign capital outflows make it a daunting task.
Any sustained decline in oil prices will be painful for Nigeria which just emerged from an oil induced recession, and whose Federal Government gets 70 percent of its budget, and 95 percent of dollar earnings from proceeds of oil sales.
Africa’s biggest oil producer relies on crude oil sales to fund its budget and is responsible for over 85 percent of the country’s revenue and a fall in revenue will hamper budgetary obligations. The dip comes three months to the general election and as Nigerian workers demand a 66 percent wage increase.
The CBN has already seen its reserves slide from a high of $47.25 billion in July to $45.90 in August; down to $44.45 billion in September and $42.13 billion in October and $41.52 billion as at November 22.
Ayodeji Ebo, managing director at Afrinvest Securities Limited does not support the view that crude oil prices attributed to the pressure on the naira but however believes that the election season is what is putting pressure on the local currency.
DIPO OLADEHINDE & BUNMI BAILEY
