05 January 2015, Lagos – A further devaluation of the naira is very likely if the price of oil in the international market drops below $40 per barrel, a new report has stated.
The development may also force the Central Bank of Nigeria to raise the benchmark interest rate by a 100 basis point from 13 to 14 per cent in order to attract Foreign Portfolio Investors, according to the Afrinvest 2015 Economic Outlook report.
The report, obtained by our correspondent on Wednesday, however, states that if the price of oil remains between $45 and $55, the CBN may keep the Monetary Policy Rate at 13 per cent before and after the 2015 general elections.
The report reads in part, “If crude oil prices drop below $40 per barrel, we fear that the uncertainties and the threatening volatility of the naira will become more daunting. Hence, a further devaluation of the currency in an attempt to cushion the pressure on external reserves and the current account (our outlook is a deficit current account balance by the first quarter) may be inevitable.
“If this plays out, the CBN may consider a further hike in the MPR as the effects of currency devaluation may threaten Foreign Portfolio Investors. Given this scenario, we predict a raise in the MPR by 100 basis points to 14 per cent.”
The report further reads, “If the oil price however stabilises around the current band of $45 and $55 per barrel, the current monetary policy stance of the MPR at 13 per cent will likely remain pre and post 2015 elections.
“Based on our convictions and expectations, we attach a probability of 50 per cent to scenario 1. On the other hand, we think the probability of scenario 2 playing out is also about 50 per cent. On a balance of considerations, we expect that the MPR dynamics in 2015 will be largely driven by the oil price outlook and its attendant impact on the fiscal stability of the country.”
The Afrinvest outlook also notes that the central bank will continue to review foreign currency holdings of Deposit Money Banks in order to reduce pressure on the falling naira this year.
The CBN had recently pegged banks’ forex holding (commonly called Foreign Currency Net Open Position) at 0.5 per cent of their shareholders’ fund. Earlier, the central bank had reviewed it from zero per cent to 0.1 per cent.
But the report quotes the Managing Director, Afrinvest, Mr. Ike Chioke, as saying that in view of the current volatility in the naira-dollar exchange rate, the NOP will be a regular monetary policy tool in the hand of the regulatory authority this year in order to keep checking the forex market.
“Net Open Position may remain an important monetary policy tool to managing exchange rate pressures, though seems ineffective in recent times,” he said.
Chioke, who ruled out the possibility of a further hike in the Cash Reserve Ratio on private or public sector deposit by the regulator, believes the CBN “may employ the use of NOP than a direct restraint on liquidity to contain exchange rate pressures.”
– The Punch