Despite the recent call by the International Monetary Fund (IMF) for the devaluation of the naira, financial analysts believe that with the sustained intervention of the Central Bank of Nigeria, the value of the naira would remain stable this year.
However, they cautioned that this would be at the expense of foreign reserves. According to Victor Ndukauba, an investment research analyst at Afrinvest, given the weakness of the United States dollar in the global currency markets, coupled with relatively high oil prices, the Central Bank has been able to intervene in the market at crucial times to meet excess demand for dollars and keep the currency broadly stable.
“We believe that sustained high prices, together with the Central Bank’s determination to mitigate the downside currency risk, should ensure that this stability is maintained throughout 2011. We forecast that the naira will stay firmly in the N151.00-N153.00 to the dollar range,” Mr. Ndukauba said.
Exchange rate movement
The naira continues to remain a stable currency, trading at N150.5 to the dollar at the official market, still within the N150±3 per cent margin set by the Central Bank. Nigeria’s external reserves currently stand at $33.8 billion, representing a 4 per cent accretion YTD.
On a year to date (YTD) basis, the naira depreciated by 0.9 per cent at the official market but appreciated 0.6 per cent in the parallel markets while the spread between the official and parallel rates narrowed by 34 per cent to N4.5k.
“The Central Bank may continue its defence of the currency due to increased forex earnings (as a result of strong oil prices and production). Near term projection therefore remains stable,” Bismarck Rewane, managing director, Financial Derivatives Company, said.
According to him, the marginal build up in reserves comes on the back of strong oil production of 2.2 million barrels per day (mbpd) and high prices (above $100), making the figure somewhat disappointing.
“However, we expect to see a better performance in the coming months now that there are no special power projects to fund, boomed oil wells have been replaced, and speculative attack on the naira has thawed (the three major factors that helped to drain reserves according to the Central Bank governor),” Mr. Rewane said, adding that the naira is expected to trade at between N155-N160/$.
According to him, analysis has shown that the cash market is funded by the Central Bank. “The Central Bank’s defence is at the expense of the reserves,” he said.
Also, Yvonne Mhango, macro and fixed income research analyst, Renaissance Capital, an investment bank, said, “A comparison with Russia and Kazakhstan suggests to us that the naira should remain stable.”
She added that the similarity with which the 37 per cent decline in the annual average oil price impacted the currencies of Nigeria, Russia, and Kazakhstan in 2009 is peculiar.
“The naira, rouble, and tenge depreciated by 26 per cent, 27 per cent, and 23 per cent respectively, against the dollar in 2009. Notably, the currencies of Russia and Kazakhstan appreciated in 2010 on the back of a 29 per cent increase in the average oil price, while that of Nigeria moderately depreciated. This, in our view, adds to the argument that the naira should not be devalued.
“Although its current account surplus estimate for 2010 was downwardly revised to 7 per cent of GDP, Nigeria’s external position remains strong with eight-to-nine months of import cover and the strong oil price supporting an improvement in the current account surplus to 8-10 per cent of GDP in 2011, on our estimates. We thus maintain our view that Nigeria’s exchange rate will remain stable in 2011,” Ms. Mhango said.
The Central Bank governor, Sanusi Lamido Sanusi, in an interview on CNBC TV last month, said that the regulatory body has chosen to go for exchange rate stability.
“It is not a fixed rate; I have made it very clear that we are not there to defend the naira at that level at all cost, but we do not have any fundamental reason for reducing the value of the naira. I have had this debate with the IMF, the recommendations they made are internally inconsistent.
“If we devalue the currency or we depreciate the currency, it adds to inflation. The question is, can we sustain this rate? And in a time of rising oil prices, stable revenues, we think we can. In fact, the depletion of reserves has ended,” Mr. Sanusi had said.
