Current Account Deficit Currency Adjustment inevitable in 2021 –Analysts
Godwin Emefiele - CBN Governor

Current Account Deficit: Currency Adjustment inevitable in 2021 –Analysts

With Nigeria’s large current account deficit and overvalued foreign exchange rate, analysts said further Naira adjustment is inevitable in 2021.

Nigeria’s local currency, Naira, has been under pressure as the Central Bank of Nigeria’s (CBN) intervention capability becomes weak due to low accretion into the external reserves.

Foreign receipts remain below pre-pandemic level due to lower oil production and largely unstable global prices of oil.

In addition, import bills have maintain uptrend while income from non-oil underperformed government expectation.

In the third quarter, Nigerian trade statistics remained unfavourable while current account deficit bloated.

While the apex bank has reviewed some policy to support dollar supply, expected impacts on supply has not reflected on currency pricing.

The downside to increase remittance to support foreign currencies inflow has been the second wave of coronavirus and movement in prices of oil remain under watch.

In the parallel foreign exchange market, the Naira depreciated by ₦5.00 to a dollar to trade at ₦470.00 from ₦465.00 on Monday.

However in the Investors and Exporters FX window, the Naira exchanged hands at ₦393.50 to a dollar which is ₦1.50 weaker than its previous close of ₦392.00 per dollar.

Last week, Naira rate closed flat at N379.00 and N380.69 at the official and secondary market intervention sales (SMIS) window.

Analysts at Chapel Hill Denham stated in a note that although the average daily turnover at the I&E Window fell by 14.9% week on week to US$134.03 million, yet the impact of the CBN’s aggressive dollar supply at the window supported a slight appreciation of the naira by 0.51% to N392.00.

The firm said despite the demand pressure which typically follows the festive period, the US dollar crashed against the naira by 2.58% week on week (or N12.00) to N465 at the parallel market.

Analysts also think the CBN’s external reserves have come under pressure thus far in December on the back of stronger FX interventions in various segments of the FX market.

The CBN’s intervention in the first two weeks of December valued at US$770 million already surpassed November level of US$454 million, and tracking at the highest level since March 2020.

“We think the reserves could stage a mild rebound in coming days due to receipt of foreign currency loans”, Chapel Hill Denham stated.

Notably, the Bank of Industry (BOI) recently entered into a US$1 billion currency swap with the CBN, from proceed of its syndicated loan facility.

This, in addition to the rebound in oil prices and receipt of the US$1.5 billion World Bank loan, should continue to support the CBN’s effort to clear to backlog of FX demand.

Notwithstanding, Chapel Hill Denham thinks further currency adjustments are inevitable in 2021E given the large current account deficit and overvalued FX rate.

Against that backdrop, the firm is expecting the CBN to weaken the I&E Window rate past N425 in 2021.

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Current Account Deficit: Currency Adjustment inevitable in 2021 –Analysts