After enjoying 3 years of relative stability, Nigerian Naira may suddenly be under pressure again as weaker crude oil prices and declining foreign external reserves have increased the probability that a currency devaluation may occur in the first half of 2020.
The size of Nigeria’s foreign reserves which is positively related to the stability of Naira has been shrinking for the last few months. Since July, Nigeria’s foreign external reserves has dropped by around $5 billion in less than 4 months.
“I think the decline we see in the foreign reserves today is a sign that the Central Bank of Nigeria has been defending the currency for a while. We have long said that Naira is overvalued and should be depreciated by at least 30% from the official exchange rate of N305. We are finally only able to see the pace of decrease in the foreign external reserves because the price of crude oil has been declining for months,” said Jeremiah Ejemeyovwi, Lecturer in Economics department at Covenant University.
Crude oil prices have declined by around 11.4% over the last 6 months, falling from as high as $70 in May to $62 as at market close on Friday. Crude oil price even fell below Nigeria’s 2019 oil price benchmark of $60 in August and has traded around the $56-$62 band for most of the period since excluding the week in which the Saudi Refinery was bombed.
The U.S. Energy Information Administration (EIA) forecasts lower crude oil prices next year as global supply is expected to increase by around 2million barrels per day (mbpd), growing from around an average daily production 100mbdp in 2019 to an average daily production of 102mbpd in 2020. This greater crude oil production is expected to reduce the market price for crude oil as oil demand cools due to weaker global economic growth.
“Naira stability is heavily hinged on crude oil prices. Depending on the direction of crude oil prices, Naira can either be due for a devaluation for it can remain very stable. Weaker crude oil price is always going to be a concern for us in 2020 especially with the fact that the government is preparing to spend more than N10 trillion to fund its budget next year. If oil prices are weaker, the repercussion on the currency can be very steep. We can’t put off the possibility of a devaluation next year even if oil prices remain stable. Naira has been overvalued for some time now and you just can’t defend an unreasonable peg forever,” said Obinna Uzoma, chief economist at EUA Intelligence.
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