The continued dwindling of the fiscal buffers- foreign reserves, excess crude account, (ECA) against the backdrop of rising and stable oil prices at the international market is responsible for the strengthening expectation that the nation’s currency, the naira, will dramatically lose value, Business Day investigations have shown.
Also, the current gap of over N13 between the official and parallel market rate which is creating arbitrage opportunity for forex dealers and lose fiscal stance of the federal government among others, is increasing dealers appetite for hedging through the growing desire to switch from Naira to foreign currency denominated deposits. The implication, they argue, is that naira will witness more depreciation.
Razia Khan, analyst with the standard chartered bank, London said, “It is correct that fiscal policy plays a key role in shaping expectations. Monetary policy has done pretty much what it can to restore FX stability. But expectations regarding the sustainability of a stable FX rate are heavily influenced by fiscal policy.
By running down its external and fiscal buffers, the ECA, Nigeria proves itself to be especially susceptible to oil price volatility. In the event of an oil price (or oil output) shock, the perception is that Nigeria will not be able to defend its FX rate. Markets are forward looking, hence the pressure on the currency now. Monetary policy will continue to try to restore stability – but it can only do so much.”
Analysts and monetary policy committee members are of the opinion that this portends danger for the economy as the Central Bank of Nigeria is getting closer to the limit of its monetary policy, stressing that the projected 6-9 percentage inflation rate can only be achieved with stable currency.
A currency crisis is a sudden devaluation of a currency which often ends in a speculative attack in the foreign exchange market. A currency crisis may result from chronic balance-of-payments deficits or from market speculation about the ability of a government to back its currency.
Although most of the analysts who spoke with BusinessDay did not see devaluation as the viable option in view of the import dependent nature of our economy, they wonder why Nigeria with a $30bn current account surplus and with oil prices at $100 per barrel is not seeing an accretion in its foreign reserves.
Besides, they say that considering the rate at which ECA is being depleted, we may wake up next year to discover that nothing is left in the account.
Another concern is the fact that no one seems to be in charge or accountable for management of oil income and questioned the relevance of the economic management team.
“That is why you have all the noise of accusation and denial with regards to what has accrued to the NNPC that is not remitted to the nation’s coffers,” says one close currency watcher
“Somehow, somebody will have to make sense of the oil production and revenue numbers. We are all going to pay a huge price for negligence as CBN can not continue to defend the naira as its balance sheet has very little wiggle room, he told BusinessDay.
Bismark Rewane in recent LBS breakfast meeting for February said that weaker naira will impair earnings of banks and also increases risk of default on dollar-denominated loans.”
Doyin Salami, in his contributions at the last MPC meeting said “From the perspective of economics theory, a persistent surplus on our current account, resulting from high oil price, should see the Naira strengthen. However, the failure to build reserves has resulted in strengthening expectation of that the Naira will lose value. This expectation has been manifested in a continuing switch from Naira to foreign currency denominated deposits –a trend I had previously described as “retail hedging.”
Unless the Fiscal side shows significant improvement imminently, the options for monetary policy may become glaringly inconsistent with the objectives and policy direction for the economy in Nigeria. For monetary policy, the challenge of managing the internal and external value of the Naira is a core element of its mandate. Achieving inflation rate of 6 ‐9 per cent in 2014 requires a stable currency.”
Salami further observed that the model articulated, in various documents, for the growth and development of the larger economy in Nigeria is predicated on Import substitution and for CBN to achieve price stability, “import substitution requires a stable, even strong currency.”
He said that given the data and information laid before the committee members “the immediate and emerging build up of banking system liquidity, it is clear that there is a need to respond to the pressure on the currency and forestall the build-up of further pressure. However, it is increasingly clear that we are approaching the limits for using the cost of credit as a management tool without inflicting damage on the growth and development aspirations of the economy.”
Sarah Alade, deputy governor and member of the MPC said, “Already, available data suggest that Gross Foreign Direct Investment (FDI) and portfolio inflows decreased significantly in the last quarter of 2013. Given that monetary policy is approaching its limit, there is need to allow for more flexibility in the exchange rate”
Suleiman Barau, another member of MPC said that the current crisis was “aggravated by activities of politicians who may have been forced to recourse to the use of foreign currencies to avoid charges associated with Naira cash withdrawals. The aggravated demand for foreign exchange (for transfers/Letter of Credit valid) that we have seen in 2013 is largely in the area of invisibles which has increased by 23.8% from 24% ($13.3b) to 48.2% ($26.1b) during corresponding period in 2012.”
Kingsley Moghalu, deputy governor and also a member of the committee said, “The role of fiscal factors in the current difficulties, marked by a severe decline in the Excess Crude Account over the past year, thus leaving the country dangerously vulnerable to external shocks as a result of the lack of fiscal savings. There is no indication that this situation will change in the near to medium term.”
By: John Omachonu
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