Plummeting Naira

At last, the Central Bank of Nigeria, CBN sells the naira at all time low of N366 per dollar, thus confirming periods of speculation on the lowering of the ailing Nigerian currency rate

By Shedrack Ifurueze

The positive closing of the Nigerian stock market on Tuesday, October 10, 2017, was short lived as the All Share Index, ASI depreciated by 0.71 percent to close at 32,115.84 from 33,875.26 on Monday, October 9, 2017 while market capitalization increased to 11.26 trillion from 11.18 trillion was like a mixed blessing. This is because on the back of this positive news was the CBN’s taking a hard, strong, and decisive action to restore investors’ confidence and calm the naira and equities markets.

Meanwhile, arising from a meeting of the Monetary Policy Committee, MPC the CBN last week though retained its 14 per cent interest, effected an 8.38 percent devaluation of the naira, thus pegging the official exchange rate at N166 to the United States, US dollar from N165 in an effort to contain pressure on the local currency, brought on by the global oil price crash. The apex bank also for the first time in nearly two years raised the Monetary Policy Rate, MPR, by 100 basis points to 14 percent from 12 percent.

It as well adjusted the Cash Reserve Ratio, CRR on private funds held by the banks to 20 percent from the current 15 percent, hence effectively mopping up liquidity and sterilizing an estimated N500 billion of banks’ deposits at zero percent interest rate.

The Nigerian currency has been under relentless pressure since the beginning of June this year when the global oil prices began to nosedive. However, it began a steep and consecutive plunge more than two weeks ago.

Penultimate Friday, October 6, 2017 the naira drop 0.76 percent to close at the N166 against the American greenback, despite the Central Bank of Nigeria, CBN’s intervention for a fifth day with the dollar sales to prop up the naira.

Foreign Exchange, FOREX dealers said this development has made the CBN to ask about 21 commercial banks to bid for $2 million each, adding that the apex bank has been selling been selling $150 million and $200 million in each intervention, hence causing a massive  depletion in Nigeria’s external reserves.

Analysts, the magazine’s investigation had revealed expect the devaluation of the naira as the Monetary Policy Committee, MPC meets next. “We opined that giving the naira exchange rate a breath along the line of wider acceptable volatility band and the official shifting of the midpoint to a higher level appears to be the most viable option along some semblance of further tightening via possible increase in private sector cash reserves ratio, CRR,” the analysts at BGL, a finance company based in Lagos said.

External investors, the magazine further revealed have increased the pace of outflows from Nigerian assets since July this year, selling out of the equity and debt markets as the price of Brent crude, the benchmark against which Nigeria’s oil is sold dropped. The foreign investors pulled out N101.2 billion, about $583.6 million from the stock market in July, this year.

A bureau de change, BDC dealer, James Suswan, informed the magazine that “the demand for dollars was mainly from importers buying foreign-made consumer goods and electronics ahead of the Christmas holiday. This, they said was putting pressure on the naira. Beyond this demand for dollars by importers, the falling global oil prices and the uncertain outlook for the naira has sparked off panic buying of the greenback by investors. The demand for the dollar has been growing while the supply was dropping,’’ he restated.

The magazine learnt that investors and importers have also brought forward their dollar obligations as the perceived risks of the nation’s social, political and economic environment increased, but some industry analysts are however, optimistic that the naira will close the year moderately at less than N170 per dollar at the interbank market.

Just like other analysts, Johnson Adeola, a financial analyst with Eczellon Capital Limited, an Investment Bank and Research Firm and Onaolapo Adewale, a money market analyst linked the current naira woes to series of economic challenges facing the nation. Both of them identified the major challenge facing the economy as the fall in the international price of crude oil.

“The CBN has been defending the naira with the country’s reserves. Since the main foreign exchange earner for the country is crude oil, the CBN’s ability to defend the currency in a sustainable manner had been weakened. The CBN has spent a daily average of about $27 million to defend the naira, affecting a decline of about 16 percent in the country’s liquid reserves,” they said.

Accordingly, this was estimated to be a reduction of about $5.8 billion in the external reserves this year, adding that the perpetual defence of the local currency in an economic environment such as the one Nigeria is currently in, is unsustainable. The analysts as well listed other factors fuelling the continued downturn of the naira as the termination of the Quantitative Easing Programme, QEP by the United States of America and the perceived socio-political issues in the country.

Meanwhile, the magazine observed that the option of devaluation of the naira is not pretty, though a mild, mini and/or indirect devaluation may be on the table when the MPC meets again, even as a consideration of increase in the benchmark interest rate, that is Monetary Policy Rate, MPR may be considered. “In the short to medium term, the new equilibrium value of the naira may be low until a longer term of wider economic balancing policy is enacted beyond the simple defence of the naira by the CBN with the country’s reserves.”

Local market observers informed the magazine that available evidence in the Lagos markets indicates that importers have already started jerking their prices up to mitigate the effects of the dwindling naira. CBN should therefore, intensify lobbying and moral suasion to the banks s owner and BDCs to save this ugly situation. In addition, the BDC operators on their part under its umbrella body are currently organizing a stakeholder’s conference in order to brainstorm and synergise on the way forward.

As the bank chiefs with the CBN led by Godwin Emefiele, the apex bank’s Governor continue to meet in order to harmonize and unveil plans on how to save the naira from further plunge, the policy makers in the financial sector of the economy may like to tinker with the benchmark interest which has been left unchanged since October, 2015.

Another angle to cushion the effecting of the rising FOREX of the dollar to the naira may be the present austerity measures rolled out by the Federal Government, which have triggered further depreciation of the naira in the interbank FOREX market and increase in the interbank lending rates.

A source also said data from the Financial Market Quotes, FMDQ showed that the naira depreciated by N1.05 kobo in the interbank FOREX rate which rose to N166 to the dollar from N165 Penultimate Friday. Market sources further attributed the depreciation of the naira and increase in interbank lending rates to the reaction to the austerity measures announced by the government.

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