‘Naira’s Depreciation To Persist’

The naira depreciated across the official and parallel markets with many pundits yesterday projecting further depreciation of the nation’s currency.

The naira depreciated to as low as N545 per dollar at the weekend but there were projections of further depreciation to some N550 per dollar within the immediate period and as low as N600 per dollar in the medium to long-term.

Despite sustained growth in Nigeria’s foreign exchange (forex) reserves, the naira has been on the downswing. At the official Investors and Exporters (I & E) Window, the naira depreciated by 0.1 per cent to N412.00 per dollar. At the parallel market, the naira dropped by 2.83 per cent to N545.00 per dollar while also depreciating by 2.48 per cent to N538.00 at the Bureau De Change segment.

The naira, however, closed flat at N380.69 per dollar at the Interbank Foreign Exchange market; supported by Central Bank of Nigeria’s (CBN)’s weekly injections of $210 million.

Market pundits attributed the depreciation to “sustained demand pressure” as huge unmet demand and wide gap between rates stoke speculative trades; exacerbating the tough exchange situation.

“In the new week, we expect I & E forex rate to further depreciate as unmet genuine demand flows to the parallel market” analysts at Cowry Assets stated.

On the outlook for naira, Chief Executive Officer, Financial Derivatives Company, Bismarck Rewane said while naira might trade within the range of N530 to N550 per dollar, in the meantime, it may rash to some N600 per dollar in the long-run as supply increases and the naira is allowed to adjust.

Nigeria’s forex reserves rose by $599 million to $34.78 billion at the last count on Thursday, sustaining a positive trend boosted by crude oil gains in recent period

Analysts said they expected speculators to continue to take advantage of the wide gap between the official and unofficial windows. Analysts also expected to see increasing shift towards dollar-denominated investments as investors seek to lock into safe havens.

Pundits, meanwhile, expected improved liquidity in the official market as increased oil inflows from rise in crude oil prices and foreign currency borrowings of $6.18 billion and IMF’s facility of $3.40 billion boost the forex reserves.

Nigeria’s leading investment finance and economic research firms had warned that the naira faces the risk of precipitous fall and depreciation in the months ahead unless the CBN take urgent and coordinated measures to address pressure points and engender an enduring clarity in forex management.

Finance and economy experts had agreed that the naira faces a tough future and the apex bank might be walking itself into a repeat of the 2016 scenario when similar uncoordinated decision led to more than 40 per cent depreciation in the national currency.

Market pundits at Afrinvest West Africa; Cordros Capital, GTI Capital and Cowry Asset Management, among others, said the naira could weaken further unless the apex bank undertake a comprehensive review and take a holistic approach to its forex management.

Afrinvest outlined five concerns that must be addressed by the CBN to avoid a repeat of the negative consequences that followed similar suspension for six months in 2016.

The apex bank had in January 2016 suspended dollar sales to BDCs over similar allegation of racketeering. This was followed by a similar directive to commercial banks to fully take up the responsibility of facilitating forex sales to Nigerians in need of forex for items not included in the list of 41 items banned by the CBN.

However, the decision failed as insufficient forex supply to banks from CBN and customers’ apathy to banks’ cumbersome kept demand pressure at the parallel market elevated. This was also compounded by a sharp decline in foreign capital flows as foreign investors shunned Nigeria due to currency risk.

With these, the foreign reserves and the official exchange rate fell by four percent and 43.7 percent to $26.5 billion and N283 per dollar over the six months period. These developments fuelled a steep rise in inflation to 16.6 percent at the end of June 2016 from 9.6 percent in January.

Pundits at Afrinvest said that to avoid a repeat of the 2016 episode, the CBN needs to provide better clarity on its exchange rate policy to gain the confidence of foreign portfolio investors.

Also, the apex bank should increase forex allocation to banks to enable them to cater to all genuine demands.

Thirdly, analysts advised the apex bank to scale back banks’ forex processing requirements to attract Nigerians into the official forex loop.

They also called on the CBN intensify public awareness on the need to embrace the latest development, to prevent unfavourable reactions that could further promote speculative trading.

Analysts said the CBN needs to provide more funding to local producers of the 44 items restricted from accessing forex at the official rate, to mitigate the likely pass-through effect of higher costs to consumers.

“In the short term, we expect the decision to amplify pressures on the exchange rate in the parallel market, given the knee jerk reaction from market participants induced by the urge to stockpile the greenback.

“Overall, we believe the effectiveness of the modalities in disbursing the greenback to the retail segment through the commercial banks would determine how much the rates at the parallel market will diverge from the NAFEX rates over the medium term,” Cordros Capital stated.

Analysts at Cordros Capital noted that Nigeria already in a difficult position as continuous decline in foreign capital inflows underscored foreign investors’ apathy to the market due to weak macroeconomic position, relatively lower yields and lingering forex liquidity constraints.

“Over the medium term, we expect foreign investors to remain on the sidelines until there is improved flexibility in the forex framework and structural reforms are implemented to reduce the economy’s vulnerability to external shocks,” Cordros Capital stated.

According to analysts at GTI Capital the ban of BDC is not the required antidote to reverse the persistent fall of naira in the currency market.

“A pragmatic change in our consumption pattern is required to reverse the trend. Unless we reduce our preference for importation, naira may not find its ways out of the exchange malady. The government should make power available to manufacturers to ease cost of production and sustain the competitiveness of locally manufactured products against their foreign peers. Attention should be given to agriculture and its value chains to enhance adequate availability of raw materials for local productions. These are factors that will drive diversification and reduce the pressure on naira,” GTI Capital stated.

Analysts called for restructuring of the BDC business to source forex from tourists who are suppliers of retail forex.

“The CBN decision to ban BDC is ill-timed and cannot weather the storm of time,” GTI Capital stated. Analysts at Cowry Asset Management said they expected the stoppage of dollar sales to the BDCs to push more demand pressure to the parallel market, weakening naira further at the alternative forex market.

Cowry Asset Management noted that the decision to stop dollar sales to BDCs may, in the short term, lead to shortage of supply to the parallel market where unfilled genuine demand at the official window and speculative demand are sought from.

“Thus, we expect wider disparity between the official market rate and the parallel market rate in the new week,” the firm stated.