Encomium
THE battered naira now sells for over N208 to the US dollar at the parallel market, even as economic experts predict the Nigerian currency might hit the N220 mark, if the free fall of oil prices continue.
The poor naira last weekend crashed against the United States dollar from 191 to 208 at the parallel market, also known as the black market. The dollar sold for between N205 and N208 on the streets of Lagos, Abuja,, Port Harcourt and other major cities in the country.
The currency had exchanged for between N188 and N191 on Wednesday and Thursday morning.
The latest fall in the naira’s value came less than two months after the Central Bank of Nigeria (CBN) was forced to devalue the local currency by eight per cent from 155 to 168 against the dollar following the continued decline in the prices of crude oil in the international market. The fall in oil revenue, from which the nation derives 95 per cent of its foreign exchange, has led to a drastic reduction in the external reserves from which the Central Bank of Nigeria (CBN) defends the naira. The reserves had fallen by over 20 per cent from $43bn a year ago to $34.4bn by January 22, 2015.
Although the apex bank still sells the dollar to approved buyers for N168 at its twice-weekly regulated auctions called the Retail Dutch Auction System (RDAS), the naira closed against the United States currency at 190.08 at the interbank segment of the foreign exchange market last weekend.
Analysts said the latest fall in the value of the naira at the parallel market was due to recent policy measures by the CBN, which were aimed at stopping speculations on the currency. The CBN had on Wednesday barred banks and other dealers from selling dollars to Bureau de Change, BDC, operators. It also said dollars bought at the RDAS and interbank segment of the foreign exchange market should be used strictly for the funding of letters of credit, bills for collections and other transactions. However, the CBN on Friday evening (January 23, 2015) increased its weekly dollar sale to the BDCs from $15,000 to $30,000 and said the move was meant to reposition the forex market.
Some analysts said the CBN’s action might calm the market and strengthen the currency. Others, however, said the naira might depreciate further next week.
The naira depreciated against the dollar as it traded at N208 from the N191.50 it sold for on Monday, January 19, thus losing N16.50 within five days. The CBN’s website, however, put the naira against the dollar at N167.50, while the pound sold for N253.20 and the euro stood at N193.89.
On the travails of the naira, ENCOMIUM Weekly was told there is scarcity of dollars in circulation, because the CBN reduced the sale of dollars to the BDCs since last year. Our sources added that the recent review of the forex trading positions of banks to 72 hours was also contributing to speculations in the system. The effect, they added, was that the naira could depreciate further by next week.
The spate of spending by politicians have also not helped the naira. The reason being that funds circulating in the economy are not backed by productive economic activities. Hence, there is no real economic growth to ginger the free falling local currency.
Industry analysts recently predicted that the naira would likely exchange against the dollar for over 220 soon. According to experts, the naira has remained under continued pressure owing to the continued fall in the prices of crude oil in the international market and increased demand for the dollar locally. The development, they said, would lead to a number of economic challenges this year.
“After the elections, the naira will sell above 220 against the dollar at the parallel market. And it is also noteworthy to say that the CBN will devalue the naira again after the February elections. The reason is due to the falling oil prices and the current demand pressure we are witnessing on the dollar,” the Acting President, Association of Bureau de Change Operators, Mr. Aminu Gwadabe said in a recent interview.
Some Nigerian and foreign analysts have also predicted that the naira will sell for between 195 and 205 at the official market this year. They equally believe that the CBN will devalue the naira again after the elections.
BGL Plc, a Nigeria-based research and investment advisory firm, quoted analysts in its recent 2015 outlook report as saying that the naira would sell around 205 to the dollar at the official market.
Goldman Sachs had also on July 18, 2014 forecast that the naira would trade at 195 to the dollar in 12 months.
Similarly, the Managing Director, Financial Derivatives Company Limited, Mr. Bismarck Rewane, said the parallel market rate was expected to cross N200 as the dollar demand pressure persists.
More economic experts have indeed argued that the free fall of the naira is not in the best interest of Africa’s biggest economy. Some of its implications according to political economist, Professor Pat Utomi is the looming hyper inflation. It’s common knowledge that the prevailing situation would lead to increase in the prices of goods and services, especially imported once or products whose raw materials are sourced outside our shores.
Also implicated is the value of naira which has now been dealt a heavy blow by its low exchange rate among international currencies.
Before the crash of the naira, the local currency was at par with the US Dollar, at least in the 70s. The fortunes of the naira however nosedived in the 80s/90s , following the bad state of the military run Nigerian economy.
Though the naira was relatively stable during the late General Sani Abacha regime, subsequent administration devised a dubious policy of fixing its exchange rate and defending same with foreign reserves which was then in excess $50 billion! But with the dramatic fall in oil revenue which is a major source of Nigeria national revenue, and its consequent depletion of the reserves (which is about $32b) the only option left to the CBN was to devalue the naira to arrive at a realistic exchange rate. A policy that saw the already battered currency loosing much of its value. It has now further altered its exchange rate to the dollar and other foreign currency.
And with the current exchange rate of over N200 to 1 US Dollar, there are fears that things could get worse with naira hitting the all time record N220 to a dollar.
– UCHE OLEHI
