12 December 2018

Nigeria: Oil Price Fluctuations, Investors' Apathy, Election Spending Swinging Naira Value

CBN Governor, Godwin Emefiele

The uncertainty in the international oil market with the resultant fluctuations in the price of oil, apathy by foreign investors and political campaign spending are jointly responsible for the recent fall in the value of the Naira, experts have told Daily Trust.

Though the Naira lost about N10 last weekend, going down to N369/N370 to $1 at the black market from N359/N360 to $1 it was for several months, the Nigerian currency slightly appreciated on Monday and ended yesterday at N365/$1.

But some experts attributed the Naira recent depreciation to the country's limited dollar reserves which is largely due to vicissitudes of the price of oil in the international market.

An economist, Edna Oji, told Daily Trust the naira might continue to swing up and down as long as our main dependent is crude oil.

Mrs Oji said this limitation in foreign reserves affects the scope and capacity of the Central Bank of Nigeria to sell dollars and buy Naira for the local currency to appreciate.

She said though the Nigerian government has deliberately kept interest rates high to attract foreign investments from countries where interest rates are low, this deliberate economic policy has negative effect on the Gross Domestic Product (GDP) as many companies may not be able to borrow domestically to run their businesses.

She advised the federal government to reduce inflation rate by tightening fiscal, monetary policy and supply-side policies as doing this will increase demand and strengthen the Naira.

However, the expert expressed fear that the coming elections will further push up inflation rate and the use of dollars by politicians for the elections may cause artificial scarcity of dollars that will further weaken the Naira.

An Associate Professor of Financial Economics at the University of Abuja, Dr. Mohammed Yelwa, told Daily Trust that the recent fall in the international price of crude oil would have adverse effect on the economy, including the possibility of a reduction in the country's foreign reserves.

Dr. Yelwa said the fall in oil price would also affect the value of the Naira as the CBN may not have enough foreign reserves to defend the value of the Naira.

Naira will be stable by early 2019 - CBN

However, the CBN's Director Corporate Communications, Mr. Issac Okorafor told our correspondent on the phone that it is natural for the market to move up and down but said the apex back will continue to maintain stability.

"The currency swap has had a positive impact on the exchange rate in the sense that if we hadn't put that mechanism in place the quantum of RMB so far sold to those doing business in China would have exerted pressure on the market in the form of higher demand for dollars", Mr Okorafor said.

He assured that the CBN would continue to supply the market with Forex.

"The rate is already stabilizing on account of the intervention we made on Tuesday and we will continue to do so. Remember in 2016 with a reserve level of below $24bn we were able to bring the rate from over 500 to the dollar to 360. Now that we have reserves in excess of $40bn we are even in a much stronger position to make speculators to lick their wounds," he assured.

He said there were several factors that could have influenced the recent fall in Naira value.

"Of course because of the election period, there are tendencies for investors to say let me take my money and wait till after the election," he said.

He maintained that indeed the currency swap deal has had an impact.

He said: "If you tally how much you have sold to those who imported goods from China using the RMB and convert it to dollars, all that demand would have been demands in the dollar and that would have had a negative impact. We have saved the naira from that pressure."

As to what the CBN is doing he said the CBN will continue to intervene in the forex market. "We intervened last Tuesday and that brought the rates to N365/$1. That's how the market moves. We will continue to fund the market."

"We know that people want to play a game on the naira. On 2016, when we had about $24bn in the reserves, we were able to pull the currency from N525/$1 to N360. Now that that we have over $40bn, we are even in a better position to deal with anybody who tries to joke with the success that we have archived in terms of stability."

He also said "Nigerians should expect that the naira will be stable early next year. We are going to work because we have the arsenal to maintain stability. So anybody trying to speculate will leak their wounds like the CBN Governor said."

Also commenting, Prof. Uche Joe Uwaleke, a Professor of Capital Market, at the Nasarawa State University said : "Exchange rate is essentially a function of demand and supply and if the naira is losing value, it simply means the demand for dollar is outstripping the supply."

"I think much of the demand is panic-driven and highly speculative against the backdrop of the recent plummeting crude oil price as well as the political and economic uncertainties in the country," he said.

On how to improve dollar supplies, he said, "one way to improve the supply of forex in the near term is to encourage the inflow of foreign portfolio investors but this may not be feasible now in view of the higher yield environment in the US and the current political situation in Nigeria."

He further advised: "Given that our external reserves level is still healthy, the CBN should continue to intervene in the forex market as much as possible. Where interventions get to the point of pushing foreign reserves into insolvency territory, the CBN may consider further tightening of monetary policy."

He also noted that the restrictions with respect to the 42 items have proved to be an effective Forex demand management strategy.

On the impact of the currency swap, he said "it's still early to assess the impact of the currency Swap deal with China which in the first instance is relatively small in size.

"As I pointed out earlier, the marginal increase in exchange rate across the segments of the Forex market is more due to the speculative demand for demand. I think the CBN is applying the right response which is why you see the naira firming up from time to time just as it has done today", he said.

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