The Central Bank of Nigeria, CBN will probably lower its targeted trading range for the naira, as dwindling foreign-exchange reserves and falling oil prices undermine its ability to halt the currency’s slide. The naira traded above the band for the first time on a closing basis on June 7 on the interbank market and has ended trading above the peg each day since June 25.
An analyst at FBN Capital, Mr. Gregory Kronsten, said yesterday that the CBN may adjust the exchange rate to within a three percentage- point band of 160 per dollar from N155 over the next six to nine months. According to him, lower crude prices are making it more difficult for the CBN to hold the line on the naira exchange rate.
The situation is compounded by the loss of about 400,000 barrels of crude oil equivalent to over N7bn per day to oil theft and illegal bunkering, which has put pressure on government finances with the CBN having to sell more dollars directly to banks at the twice weekly Wholesale Dutch Auctions, WDAS, to support the naira value amid high demand. It sold $700m last week, compared with $600m the previous week, at N155.76 to N155.79 per dollar.
Lower exchange rate would mean higher cost of imported goods including fuel and a rise in operational cost for several sectors including aviation, hospitality and manufacturers which rely on high proportion of imported inputs.
Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane had said that dwindling oil receipts implied that a decline in the federal allocation was a possibility, which according to him, posed a downside risk to the naira and a depletion of external reserves He added that the naira depreciation is expected to result in increased fuel prices and lease payments by domestic operators will go up significantly, as they purchase forex, consequently increasing the cost of air travel to Nigerians.
Data from the CBN yesterday showed that foreign reserves dropped 3.2 per cent or $1.54bn month-on month, from $48.5bn in June 19 to $46.9bn in July 19, this year. The $46.9bn reserves represent about 28.1 per cent increase over the $36.6bn recorded on July 2, 2012. The nation’s external reserves had risen steadily since last year due to high oil prices and stability in the foreign exchange market. The Federal Government had targeted $50bn reserves by the end of 2012.
The reserves, however, closed the year at $44.26bn on December 24, 2012, finishing $6bn below the government’s target. The CBN Governor, Mr. Lamido Sanusi, said in May that the outlook for the country’s foreign reserves this year was mixed.
He said that the foreigncurrency reserves would probably keep expanding, while facing risks from lower- than-projected oil output and falling prices. Sanusi had in November 2011 devalued the midpoint of the bank’s exchange-rate range at its twice-weekly auctions from N150.
The naira strengthened less than 0.1 per cent to N161.18 per dollar on Monday. The currency has weakened three per cent this year compared with a 0.5 per cent decrease in the currency of Angola, which vies with Nigeria as Africa’s top oil producer. Bonny Light crude, the country’s main export, rose 0.1 per cent to $109.98 per barrel last week.
The grade climbed to as high as $120.54 on February 8 and fell as low as $100.31. The oil output slid for a third month in June, dropping by 70,000 barrels a day to 1.88m barrels amid theft and damage to infrastructure. An emerging-markets Strategist with Standard Bank Group Limited, Mr. Samir Gadio, noted that in the absence of capital inflows over the past two months, the CBN has had to step up its foreign currency auction and direct sales to banks to address the dollar demand-supply mismatch.
Another analyst at Sterling Capital Limited, Sewa Wusu, pointed out that the CBN may increase its exchange- rate band to N160 per dollar to increase costs for importers.
The Coordinating Minister for the Economy, Dr. Ngozi Okonjo-Iweala had recently pointed out that with just $3.6bn left in the excess crude account after withdrawals to augment monthly allocations to the three tiers of government, “should the price of oil drop, we have no cushion.”
“The $3.6bn in the excess crude account is not enough to sustain the country for any period of time,” she said. The minister recalled that “it was difficult getting governors to agree to $1bn savings for the Sovereign Wealth Fund, SWF.”
“Now that the price of oil is high, we should be happy but because the quantity we produce as a country has dropped, we are not selling expected quantities. So, not much money is coming in.
We are selling below budgeted quantities,” she said. Okonjo-Iweala said: “The Federal Government is not dipping hands in anything. I can tell you how much is in every account.
We must save for the future because soon Ghana and Angola will join the league of countries that have savings, whereas Nigeria is fast depleting the little she has.”
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