18 December 2015, Lagos =- Economists and financial analysts say the devaluation of the naira has become inevitable in the face of continued economic challenges, especially the free fall of the naira.
The naira had continued its free fall on Thursday, crashing to 280 against the United States dollar at the parallel market, a day after being sold at N269 against the dollar.
“The CBN needs to be realistic in its strategies given that the main source (crude oil) of its forex has continued to wane,” the Head, Research and Investment Advisory, Afrinvest West Africa, Mr. Ayodeji.
“Unless a deliberate effort to devalue the naira by a minimum of 25 per cent to N248.6/$1 (our forecast) within the next few weeks to reduce the arbitrage between the official market and parallel (unofficial) market, we would not be surprise to see the naira trade around N300/$1. The existing spread (over N80/$1) has incentivised round-tripping among major players in the forex market.”
The naira, which had been trading around 241 and 243 against the greenback for a long time, began a steady decline about three weeks ago when the Central Bank of Nigeria stopped the sale of foreign exchange to over 1,600 Bureaux De Change operators due to improper documentation.
In addition, on Wednesday, the CBN cut the amount it sold to each of the 2,270 BDCs that participated in the weekly forex sale to $10,000, down from the $30,000 it sold to them last week. While the central bank sold $84.5m to the BDCs last week, the amount was reduced to $23m on Wednesday.
According to analysts, the significant cut in forex supply to the BDCs coupled with the existing huge unmet demand at the CBN official window has led to the recent pressure on the naira at the parallel market.
Businesses have been struggling to access dollars as the CBN rations the greenback to preserve the country’s external reserves, which stood at $29.46bn as of December 15.
Analysts said the continued fall of the naira against the US currency at the black market could cause further inflation and affect businesses negatively with much backlash for the economy.
At the official interbank market, the currency has been pegged since February and closed at 196.97 on Wednesday.
Economic and financial experts have linked the continued fall of the naira at the parallel market to several reasons, ranging from the administrative controls imposed by the central bank to the speculative demand for the dollar by individuals and businesses.
Other experts, who spoke to our correspondent on Thursday, agreed that the devaluation of the naira was inevitable.
“Naira at 280 against the dollar at the parallel market is more speculative than being market-driven. The reason for this continued fall can be linked to a combination of factors. Well, the naira should find its equilibrium,” the Chief Executive Officer, Financial Derivatives Limited, Mr. Bismarck Rewane, said.
Rewane had said that the devaluation of the naira was inevitable considering the margin between the value of the currency at the official market and the parallel market.
The Managing Director, Eczellon Capital, an investment bank and research firm, Mr. Diekola Onaolapo, said that considering the continued pressure on the local currency, “devaluation of the naira seems almost inevitable; we may need to devalue.”
He, however, said the current pressure on the currency might also be linked to the end-of-the-year rush, which bordered on foreigners having the need for dollars to travel out of the country for vacation.
Onaolapo is also of the opinion that the latest pressure on the naira may not have any major macroeconomic backlash on the economy.
Currency strategist at Ecobank Nigeria, Mr Kunle Ezun, linked the naira’s freefall at the parallel market to supply problem.
The Head of Portfolio Investment at Meristem, a research and investment advisory firm, Mr. Taiwo Yusuf, said, “The administrative controls are not working. We cannot wish away the demand. The administrative controls imposed by the CBN are making it difficult for us to have a stable naira.
“We are pushing ourselves towards being a productive economy but we are not yet there. We may need to take steps that will help to attract foreign portfolio investments into the country and keep them here for the main time. Otherwise, the current situation may bring imported inflation and hurt to businesses.”
However, the CBN blamed the free fall of the naira on the activities of speculators.
The Director, Monetary Policy Department, CBN, Mr. Moses Tule, said in a statement on Thursday that the naira was under pressure because speculators had taken positions on the currency with a view to making excess gain from currency trading.
According to Tule, currency speculators were determined to put severe pressure on the monetary authorities in order to ensure that the CBN further devalued the naira.
The CBN, he said, had a responsibility to manage the economy and would do anything to protect it from those he described as “economic predators.”
While maintaining that the only rate in the currency market was N196.47 to a dollar, he wondered why indigenous operators in the Bureau de Change segment of the market chose to make huge profits at the expense of customers in genuine need of the currency.
Tule said, “We know what the fundamentals of this economy are and we will continue to take the right economic decisions on what to do and not when people sitting out there speculating on the currency think the naira should be devalued so that they could make profit out of it.
“No country quotes its exchange rate with reference to the BDCs rates. The currency has a reference rate and that is the interbank exchange rate.”