While
the naira continues its slide, the Central Bank of Nigeria (CBN)
insists that it would prefer to commit foreign reserves to defend the
naira in order to curb inflation. After Wednesday’s currency auction,
the naira slid to N153.39 to the dollar, from N153.18 at the previous
auction.
The
Central Bank sold $300 million at N153.39, having sold same at N153.18
on Monday. The naira fell to N157.05 to the dollar on Wednesday at the
interbank market, its lowest since March.
Lamido
Sanusi, CBN governor was quoted as saying that, though he was in favour
of a stable currency, he would rather use the country’s foreign reserve
to support the naira than build up reserves at the risk of inflation.
Foreign reserves inched up from $33.5 billion last week to $34.56
billion on Wednesday.
The
International Monetary Fund (IMF) in November advised the country to
allow more flexibility in the foreign exchange market. Scott Rogers,
IMF country director for Nigeria said allowing more flexibility in the
exchange rate would mean less pressure on the foreign reserves and
interest rates.
No clear reason
Market
operators are at a loss as to why the currency is in depreciation
especially as foreign exchange demand has eased in the aftermath of the
elections. “The lack of recent current-account data makes it difficult
to assess what exactly is driving down the Nigerian currency. However,
we find it surprising that the naira should be in the N157/$1 region –
especially given the timing (with the general elections having been
concluded)”, Yvonne Mhango, analyst, Renaissance Capital, an investment
bank said.
According
to her, the deterioration of Nigeria’s external sector fundamentals in
2010 – which was illustrated by a large drop in official reserves in
2010 – was largely due to a 31 percent year-on-year increase in federal
government spending. High government spending partially explains the 66
per cent surge in import demand in 2010.
She
however is optimistic that the currency will recover. “We therefore
take the view that the naira’s recent weakness is temporary. In our
view, the currency should retrace to N155/$1 and stabilise around that
level for the remainder of 2011. We believe the main risk to this
outlook, is if the new administration does not follow through on its
rhetoric on fiscal consolidation in 2011” she said.
Measured approach
Finance
experts say the presidential election was a significant factor behind
the increase in government expenditure. It is however expected that now
that the poll is behind us, spending should slow in second half of
2011, reducing the pressure on import demand – and by implication,
foreign reserves.
Bismarck
Rewane, managing director, Financial Derivative Company said the
question of the value of the naira has continued to dominate the
national debate.
“This
national discussion has made some multinational companies, in fear and
anticipation of a naira devaluation, to pay hefty sums as hedge
premiums on forward forex positions. This shows that the value of the
naira is not only of domestic and indigenous interest but of great
concern to international investors and portfolio managers” he said.
Mr Rewane said it was time for the regulators to take a more
measured approach to exchange rate management. “It is time to allow
greater flexibility and reduce the frequency of intervention” he added.
