There are no easy cards for the Central Bank of Nigeria (CBN) to play in its effort to defend the naira and maintain price stability, according to analysts.
Experts who spoke to BusinessDay say they see an inevitability of devaluation of the nation’s currency staring at the CBN as the zeal to defend the currency bumps against the reality of dwindling foreign reserves now at $39.7 billion.
Already, the consistent pressure on the naira within the last few weeks has necessitated the increased intervention of the CBN at the expense of the foreign reserves, with the regulator selling approximately $6.0 billion at the weekly Retail Dutch Auction System this year.
The pressure, which is driven by foreign portfolio flow reversals, has also led to a 3.0-percent depreciation of the naira year-to-date at the interbank segment of the foreign exchange market and an 8.7-percent decline in the reserves.
“Despite the CBN’s commitment to stability, the $39.7 billion 12 months low of the reserve highlights the increasing vulnerability of the economy to external shock,” say Afrinvest analysts, noting that 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 of monetary and liquidity conditions is urgently required if the CBN still wants to protect current USD/NGN levels,” they add.
The decisions taken at the next MPC on 24/25 March will be very important in determining the naira level in the medium term, analysts say.
“Whether the Central Bank will hike the MPR and CRR on public and private sector funds at the next MPC meeting, and even possibly resume a wave of more aggressive OMOs, will certainly weigh on the fortunes of the NGN. A neutral monetary stance and policy rate decision would, however, probably compound upside risks to USD/NGN,” says Samir Gadio, emerging markets strategist at Standard Bank, London.
Analysts at Ecobank say a couple of issues are possible in the short to medium term, which are not limited to NGN devaluation. “But we think the CBN management under the acting governor, Sarah Alade, would do everything possible to ensure NGN stability (although the volatility will remain, due to structural defect between supply and demand),” they said in their daily market update.
Hussein Mohammed, former director, Nigeria Deposit Insurance Corporation and chief executive, Muregi Associates, Abuja, says he thinks “the implications are self-evident as there will be too much stress on the naira, which will further compound the already worsening situation and perhaps lead to devaluation of the naira”.
Consequently, some other analysts say that considering the risks to the economy from external shocks due to Nigeria getting 95 percent of foreign exchange receipts from oil earnings and also the infrastructure and energy bottlenecks, it is becoming an uphill task for the CBN.
With the current portfolio flow reversals due to the United States’ Quantitative Easing, the only way out for the CBN, according to the analysts, may be further monetary policy tightening, which is a possibility at the next MPC meeting in three weeks.
“A naira adjustment is only a question of time,” Bismarck Rewane, chief executive, Financial Derivatives Company, said in the current FDC Bi-monthly Economic and Business Update.
By: John Omachonu
