• Wednesday, June 12, 2024
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Why another round of Naira devaluation is inevitable

Market fundamentals still strong for property demand despite election fears, naira devaluation

Despite several efforts by the Central Bank of Nigeria (CBN) to shore up the value of the naira, the naira has taken a sharp downward spiral. In a bid to salvage the economy from the Nigerian economy from the volatility of the global crude oil prices CBN de- valued the naira by 8 percent in November accompanied by a 100 basis point interest rate hike to a record 13 percent.

The naira depreciated below 200 per dollar for the first time last week as the nation’s election postponement increased the likelihood that the naira will be devalued. Investors are delaying decisions to commit money to Nigeria as security forces, which requested the vote date be changed, push to secure the northeast from a raging Islamist insurgency. Over the last year, the central bank has burned through 20 percent of its reserves — $28 million a day — in defence of a currency that has remained under unrelenting pressure because of a basic lack of petrodollars.

Wrapping up a monetary policy speech last month, the central bank of Nigeria Governor Godwin Emefiele declared that the naira, which has crumpled to N206 to the dollar with the drop in oil prices, was “appropriately priced”. Emefiele has continued to pledge the apex bank commitment and ability to defend the Naira, the current volatility as well as the persistent drop in the external reserves are both indicators that the managers of the economy must come to terms with the reality that the situation could actually get worse before it gets better.

The Governor, on Thursday last week reiterated that the naira is appropriately priced in an interview with CNBC Africa. “It is not appropriate at this time to begin to consider floating the naira very freely,” he said. “When it is left to float in an import-dependent economy, what that means is that you will find that the exchange rate will spiral out of control.” He also told investors that there was no need to panic despite a nearly 25 percent slide against the dollar in the last three months. The interbank market, where 80 percent of forex transactions are carried out now trades for N206/$, while the parallel market is pricing the naira at about $210/$.

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Uncertainty Nigeria’s Independent National Electoral Committee (INEC) announced on February 7, that it has postponed the country’s presidential elections by six weeks. This, is to enable a joint multi-country military action continue its campaign against the Boko Haram insurgents in the North- Eastern region of the country. This decision, regardless of its justification, could further harm the already suffering economy. The Naira has fallen by over 30 percent in the last six months. This was driven by the global fall in oil prices, and dampening investor confidence due to the elections. It will only tumble further with a hike in political tension, which the postponement of the elections has a high potential of doing “Fears and uncertainty will build up a speculative bubble around the market and this will affect the value of the naira and inflation will in- crease,” according to Bismarck Rewane in an interview with CNBC Africa.

Oil Price direction yet unknown In the past eight months, the world has witnessed the greatest oil meltdowns in history. Winners and losers have emerged from this trend, and this has triggered a number of serious macroeconomic outcomes that affect virtually all regions on earth. Oil price is gaining some momentum as Brent crude traded for $57.05 per barrel on Friday with a gain of 4.4 percent. Inability of Government to meet its 2015 budget The Finance Ministry has proposed austerity measures for 2015.

Most analysts believe the measures are too little too late, as the country failed to diversify before oil prices plunged. The implications of oils fall for Nigeria are profound and include a possible ratings downgrade, increased naira pressure and fiscal constraints at the Federal and State levels that may lead to unrest, ac- cording to Meristem Securities analysts. “The fiscal purse of the government has been failing the resilience test on account of lower crude oil export and prices. Over reliance of State Governments on FAAC allocation is likely to trigger protests at the state level,” Meristem said in a January 08 economic commentary.

The gross Federation ac- count revenue – which has been declining since the sell- off in crude – was N1.034 trillion in June, N953.6 billion in July, N859.6 billion in August, N831.8 billion in September, and N743.6 billion in October, Central bank of Nigeria (CBN) data show.

Oil revenues accounts for up to 75 percent of the Federal budget but are much higher in majority of Nigeria’s 36 states. While oil continues to dominate FX inflows and federation account receipts its share of GDP at market prices in Q3 2014 amounted to just 10.3 percent, meaning the Finance Ministry has yet to fully tap Nigeria’s non-oil GDP of N70 trillion for revenues even as the Government celebrated the GDP rebasing that saw Nigeria overtake South Africa as the largest economy in Africa.

Speculative demand Trading restrictions introduced in December were needed to cut “spurious or speculative demand” for dollars, Emefiele said in an interview last month. “Any investor that wants to go out is able to do so freely, without any hindrance.” CBN declared a war on speculation, with one of its weapons being to force commercial banks to close off their currency positions at the end of a trading day, rather than maintain an overnight stance on either the naira or dollar.