Continuing pressure on the external reserves and persistent strong demand from importers for foreign exchange will likely result in another devaluation of the naira in the coming months, analysts at FBN Capital have predicted.
In a note, the analysts forecast that the naira will fall to N215/dollar on the interbank market by the end of 2015, stressing that the local currency will decline despite Central Bank of Nigeria (CBN)’s measures to defend it.
As the analysts put it: “We see another devaluation ahead. The CBN’s administrative measures and market ploys will be inadequate to hold the line in the face of pressure on reserves and of still healthy fx demand for imports. Its resistance may continue into the New Year but we forecast an interbank rate of N215 per US$ at end-2015.”
The analysts also predicted that the benchmark interest rate-the Monetary Policy Rate (MPR) will be lowered to 11.50 per cent by the end of next year. According to the analysts, “next policy rate move to be downward: We sense that the Monetary Policy Committee (MPC) has become relaxed about above-target inflation and is looking to encourage a sluggish economy.
The ‘disconnect’ with the real economy notwithstanding, we see three rate cuts in 2016 and an endyear policy rate of 11.50 per cent.” Analysts point out that naira volatility has worsened in recent days on both the interbank and parallel markets. The local currency traded at N225 to the dollar on the parallel market last Friday, weaker than the N224 traded at the beginning of the week.
Also, although the CBN strengthened its exchange rate peg to N196.98/dollar on the interbank market last Monday, seventy-two hours later, it had weakened the peg to N197/dollar. It was the ninth time the apex bank would be adjusting the peg since it scrapped the Retail Dutch Auction System (RDAS) window and introduced tight currency controls in February this year.
Despite the exchange rate volatility, the CBN has resisted calls to further devalue the local currency following earlier devaluations last November and in February. But it has continued to intervene at the interbank market periodically to provide forex liquidity support for the local currency. It also sells dollars twice-weekly to Bureau De Change (BDC) operators as part of efforts to support the naira and narrow the gap between the official forex and parallel market.
In addition, the regulator has resorted to rationing dollar supply by restricting access to the green back for import of certain items, frustrating businesses. Vice President, Professor Yemi Osibanjo, has said that the Federal Government backed the apex bank’s measures saying that the restrictions will be kept for now to preserve the country’s foreign reserves but that they will eventually be relaxed.
At an interactive session with journalists at the recent World Bank/ International Monetary Fund (IMF) annual meetings in Lima, Peru, the Director, African Department of the IMF, Ms Antoinette Sayer, said that the CBN forex measures needed to be reviewed.