Ayodele Aminu
4 December 2008
Lagos — The Central Bank of Nigeria (CBN) yesterday fulfilled its promise to veer into the inter-bank market where it allegedly sold $180 million to just one of the 24 banks in the country.
Governor of the CBN, Prof. Charles Soludo had last Wednesday assured foreign exchange end users that there was no cause for alarm, stressing that the apex bank would meet the foreign exchange demands and that bank has financial capacity to meet the demands.
Specifically, he said the apex bank would participate in the two - way quote, where a dealer gives a quote in which he indicates the price he is willing to buy and sell.
This was expected to calm the market but the reverse was the case at the black market (the unofficial market) where the naira lost N10 against the dollar to trade at N135:$1.
The decision of the apex bank to rationalise sale of foreign exchange in the past week had necessitated the depreciation of the naira, which had in the past week weakened 8.5 per cent against the dollar, trading at N128.00/$1 at close of business yesterday, having tested N130.00/$1.
The CBN's decision to sell only $100 million at its bi-weekly forex auction, last week Wednesday (versus an average of $400 million over the prior two months) against roughly $1billion of demand had triggered the depreciation of the naira. Since then, the naira had reverted to the average exchange rate level witnessed in 2006 (N130.00/$1).
Experts insist that without the banking watchdog's intervention, and on further oil price weakness (to, for example, $35.00/bbl), the naira exchange rate against the dollar could be N135.00/$1.
They however believe that with Nigeria's foreign reserves of $57.2 billion ($77.2 billion including the excess crude account); the CBN has the capacity to support the naira at its current level and provide much needed market liquidity without significantly eroding foreign reserves. The question they are however, asking is will it match demand and do so?
They also note that further oil price weakness, and the release of the 2009 preliminary budget last Tuesday coupled with the targeting of a deficit of N1.1trillion ($9.4 billion) for next year, up from N560billion ($4.8 billion) in 2008 may also had led to further weakness of the naira.
Nonetheless, the experts insist that Nigeria's foreign reserves could be used to support the naira at its current level and provide market liquidity, without significant reserves erosion. A caveat to this they said: "is that oil prices could continue to weaken further and test the CBN's resolve. Oil is currently trading at close to $40.00/bbl, versus Nigeria's 2009 budget target of $45.00/bbl. Oil last traded at this level in February 2006 (against an exchange rate of N131.50/$1). We note that oil traded at $35.00/bbl in June 2004 (N132.5/$1), and at $30.00/bbl in Feb 2004 (N136.5/$1).
"Over the next six months, we expect the naira to trend to N125.00/$1, and target N120.00/$1 by December 2009. We think economic growth will reach 6.6 per cent in 2008 and exceed 6 per cent in 2009, on the back of the continued expansion (+8 per cent) of the non-oil sector (80/GDP). We assume negative real oil-GDP growth in 2009."
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