There might be need to adjust the Nigerian currency, the naira, above its upper band as oil price continues to slide to levels that suggest more pressure on already dwindling foreign exchange reserve.
Analysts across a wide spectrum say the apex bank’s move to maintain the current exchange rate regime is understandable, given the potential inflationary impact of devaluations on an import dependent country like Nigeria.
Economists however say that if the Central Bank allows the forces of demand and supply to determine the exchange rate, the naira will likely track the move in oil prices.
When this happens, the currency will find its true value at the equilibrium point.
“If the Central Bank allows the market to determine the exchange rate, then the main driver of the exchange rate will be the oil price,” said Charles Robertson, Global Chief economist, Head of Macro Strategy Renaissance Capital, in an emailed note to BusinessDay.
“At $80 oil, we imagine the NGN could be 180/$. If oil is at $35, then perhaps 260/$ is more appropriate. Also investors worry about putting money into Nigeria at 200/$ when they are not certain they will be able to withdraw any profits at the official exchange rate,” said Robertson.
Brent crude was down 85 cents at $37.60 as of 12.29 GMT. Analysts are watching for any test of Brent’s December 2008 low of $36.20, with a break below that level taking the benchmark to levels not seen since 2004.
Nigeria and other oil producing countries are struggling with more than 60 percent slide in the price of oil, an uncertainty that forced the Central Bank to carryout currency restrictions with a view to curbing inflation and protecting the reserve from continued depletion.
Nigeria generates 90 percent of export earnings and two-thirds of government revenue from oil.
While the naira is all but fixed at 198-199 per dollar, prices of forwards suggest traders expect it will weaken 10 percent to 221 in three months and 23 percent to 258 in a year, according to Bloomberg data.
The black-market rate used by exchange bureaus fell by 2.71 percent to N260.00/$ on Monday December 14 as the Apex bank denied over 60 percent or over 1,600 BDC Bureau De Change (BDC) operators access.
While trading restrictions introduced by the CBN have stabilised the economy and stemmed the rout, analysts believe a slight devaluation will curtail the loss of foreign direct investment, as investors flee the country and fret that a sudden devaluation would cause losses on their naira holdings.
The NSE data showed total foreign portfolio transactions, which peaked at N133.95bn in February 2015, dropped by 60 percent to N54.20bn in October 2015, according to Tajudeen Ibrahim, head equity research Chapel Hill Denham Limited, a Lagos based investment firm, in an emailed note to BusinessDay.
The transactions also show a net outflow of foreign portfolio investment of over N57bn between January and October 2015. This is negative for the Nigerian economy and the market in particular, Ibrahim said.
Analysts say planned investment in capital expenditure by the Buhari led government will create jobs, boost liquidity, attract investment and inevitably culminate in economic growth and development.
Government plans to increase budget to N6.4 trillion without exceeding borrowing limits, amid the fall in oil price. The government will base its budgets for the next two years on oil prices of $38 a barrel in 2016 and $48 in 2017, according to the budget office.
“We anticipate that the current drive of the government with respect to infrastructure and economic development will in the medium term result in massive inflow of foreign direct investment, as the enabling environment for industrialisation will gradually take shape, and foreign investors will take advantage of it,” said Saheed Bashir, equity research analyst with Meristem Securities Limited in an emailed note to BusinessDay.
Analysts say the widening gap in Interbank, Parallel Forex Market is spurring round-tripping, and that if this practice continues; the true value of the naira will continue to be elusive.
The problem with having two different exchange rates is that this can encourage corruption and illegal activity, said Robertson.
BALA AUGIE
