Nigeria’s currency will weaken to N375/$ on the back of continued pressure on external reserves, vagaries of crude oil price, and slowing global growth momentum, according to Renaissance Capital Limited.
“Inflation of 10 percent pushes both numbers higher by roughly 7 percent a year – implying 500 or 410 as the average rate next year. A recession hitting oil prices would naturally justify weaker figures,” said Charles Robertson, Global Chief Economist at Renaissance Capital.
“With no US recession … Nigeria can hold the current spot rate for some time – at least until mid-2020 if it wants to,” said Robertson.
Nigeria’s Naira has been under pressure due to outflow pressure as rising imports have resulted in current account deficit, and investors have dumped the country’s assets.
In recent times, fresh concerns have emerged over the rate of decline in Nigeria’s foreign reserves.
In the third quarter of (Q3 19 alone), the country’s external reserves declined by $3.2 billion to settle at $41.7 billion, no thanks to fall in oil prices that stoked capital outflow.
The volatility in crude oil price has forced the Central Bank of Nigeria (CBN) to support the local unit at the expense of the reserve.
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Nigeria’s import cover as of Jul19 stood at 10.2 months, lower than 15.8 months in Jan-19, according to analysts at United Capital Limited.
Analysts at Chapel Hill Denham believe the CBN has some policy room to adjust to terms of trade shocks.
“In our view, FX subsidy (PMS is priced at 285 and customs duty at 326) will likely be adjusted first before I&E peg collapses,” said analysts at Chapel Hill Denham Limited.
Nigeria operates a multiple exchange rate system in a bid to stem demand for dollars but the International Monetary Fund (IMF) and investors have continually criticised this system as they prefer a unified foreign exchange system.
It created an investors and exporters window in 2017, in which the naira was allowed to weaken, and has been steady at 360 against the greenback. There’s also the Nafex rate, which references the interbank rate, and another set at regular auctions.
The Nigerian Customs Service had told importers to pay for duties at a weaker rate of N326/$ from N306, but manufacturers bemoaned the new policy on the ground that it would disrupt their business.
The adoption of market determined will be welcomed by market participates, who have blamed government for capital controls, a policy that contributed to the economic downturn of 2016.
Additionally, total deregulation of the downstream oil and gas industry will attract the desired investment to the sector while paving the way for government to save money and fund capital projects need to create an enabling environment for business to thrive.
Inflation rate is at 11 percent, which is below the central bank range of 6 percent and 9 percent, and the World Bank expects the inflation rate to likely pick up on the back of increased Value added Tax (VAT) and hike in minimum wage.
The Naira weakened 21bps wow against the US dollar to close at 362.77 in the I&E Window on Friday, but was unchanged at N358.13 and N360.00 at the I&E Window and parallel market respectively.
