16February 015, Abuja – The naira last week hit an all-time low of 206 against the dollar after the Independent National Electoral Commission postponed the general elections by six weeks. Though the Central Bank of Nigeria told investors not to panic, analysts believe another devaluation of the national currency is looming.
Although the Governor, Central Bank of Nigeria, Mr. Godwin Emefiele, has ruled out the possibility of an emergency Monetary Policy Committee meeting that will lead to a further devaluation of the naira against the dollar, economic and financial analysts insist that increasing the official midpoint of the naira from the current 168 is inevitable.
Dwindling oil revenue, occasioned by falling oil prices, has forced the CBN to spend a substantial part of the external reserves to defend the currency in the last six months.
To stop the ugly trend of falling reserves, the CBN’s MPC on November 25 last year devalued the naira by eight per cent from 155 to 168. It also set the naira band at 160 to 176. However, the naira has been trading outside this band at the interbank foreign exchange market in the last two months.
According to economic analysts, with the decline of the naira to over 200 against the dollar at the interbank market last week following the postponement of the elections by six weeks, a further devaluation of the currency is imminent.
“We believe the CBN may need to call an emergency MPC meeting to devalue the naira; the pressure has been building up for a very long time,” the Head, Investment and Research, Afrinvest West Africa Limited, Mr. Ayodeji Ebo, says.
He explains, “We think the plan was to carry out the devaluation immediately after the elections. But with the postponement of the elections by six weeks, we don’t think the CBN can cope to keep defending the naira over that long period.
“Considering the illiquidity in the system presently, and the potential loss of $5.9bn which the listing of Nigerian bonds on the JP Morgan bond index has brought to Nigeria, they may have to look how to devalue (the naira) or risks depleting the reserves.”
Reports state that Nigeria has been spending over $100m on daily basis defending the naira.
The Head, Investment and Research, BGL Plc, Mr. Femi Ademola, says if the Central Bank of Nigeria should devalue the naira against the dollar before the elections, it may need to consider something around 195 (+/-10%).
Going by the current market trend at the interbank market, the naira will be appropriately priced around 175.5 and 214.5, according to Ademola.
This is close to the projection of Ebo, who thinks the naira will be appropriately priced against the dollar at 190 (+/- 5%). According to him, a band of 181.5 and 199.5 can be an appropriate band for the naira if the central bank chooses to devalue before the elections.
This is close to the view of some bankers.
The Managing Director, Guaranty Trust Bank Plc, Mr. Segun Agbaje, had on Thursday during the Bankers’ Committee press briefing in Lagos, said the current rate of the naira at the interbank market was indicating a ‘price discovery’ for the central bank.
Agbaje had said, “I think that on the issue of exchange rate, exchange rates are very emotional things. The reality is that devaluation is not a curse. The Norwegian Krone, which is one of the strongest currencies, devalued by 13 per cent last year. I think about half way through last year, the pound to the dollar was about 1.67; today, it is barely 1.52. So, where we are today is that oil prices are down. As a country, we are trying to find what level the currency devalues to.
“There is no central bank in the world that allows a free flow of its currency. What you do is try to find a price discovery and find a rate at which you can live with. I think we are going through that process in Nigeria. That is why at the last MPC meeting, the CBN devalued and also moved the midpoint of the naira.
“What you are seeing in the interbank market is again some price discovery. The thing about price discovery is that rates will go up and rates will come down. And so for those who choose to speculate, you run the risk of actually losing money. So, until we find what that rate is, which I believe in my own opinion we are around there now, and I believe that the CBN is also going through that price discovery.”
Renowned financial expert and Managing Director, Financial Derivatives Company Limited, Mr. Bismarck Rewane, last week said a further devaluation was needed sooner than expected.
Speculation that the CBN may devalue the naira again increased on Wednesday when the currency hit an all-time low of 202 against the dollar at the interbank segment of the foreign exchange market.
Rewane says, “It (naira devaluation) is not in the hands of Nigeria any more. It is now imminent and inevitable. It will happen sooner than you think.”
On the likelihood of an even weaker naira he says, “As long as the uncertainty increases, the risk increases. When the risk increases, the volatility increases. If the volatility increases, then the currency and all other variables come under additional pressure.”
But Emefiele told the CNBC Africa on Thursday that there was “no need to panic” about a slide in the currency.
“We are not in the best of times but there’s no need to panic,” he said, ruling out an emergency Monetary Policy Committee meeting. He also stated that floating the currency was not an option.
Figures on the CBN website on Thursday showed that the foreign exchange reserves fell to $33.4bn as of February 10, a drop of $1bn over the previous 12 days as the CBN sold hard currency to defend the naira.
The reserves stood at $34.4bn on January 27, 2015.
Reports indicate that the naira is likely to continue its fall next week as investors worry over the postponement of the general elections by the Independent National Electoral Commission and its impact on the economy and the country.
The naira hit a record low of 206.60 against the dollar on Thursday at the interbank market, and dealers halted electronic trading for the second consecutive day.
Dealers had halted trading on Wednesday when the naira hit 204 against the dollar.
“Demand remains strong and unless we have large dollar inflows into the market, the local currency will continue to be under pressure,” a dealer said.
The CBN has repeatedly sold dollars to support the local currency. It has also been relying on the external reserves to defend the naira.
Through it all, Emefiele has maintained that the naira is ‘appropriately priced’, ruling out the possibility of another devaluation.
The view among analysts is that the naira needs to be devalued further and despite its resistance to the option, the central bank may be forced to do just that soon.