FX, Price Stability Interest Rate: CBN Fails on Policy Quality Tests
The sustained depreciation of the Nigerian local currency, the naira, has worsened the Central Bank of Nigeria (CBN) scorecard as monetary authority. Key macroeconomic indicators have worsened in the last few years, and the outlook remains bleak.
Based on the latest data update, the apex bank has failed to achieve price stability with ugly inflation conditions in the country, a development stoked by restrictions placed on 43 items from accessing foreign exchange.
In the third quarter of 2019, Africa’s most populous country with near zero comparative production advantages closed borders ‘emotionally’, thus internalising inefficiency.
The apex bank’s monetary policy tightening inflation-fighting approach has also failed to curb Nigeria’s stubborn inflation condition. The apex bank had pegged its inflation target between 6-9%.
At the extreme, its politically influenced naira depreciation has failed to achieve the market clearing rate target. Companies are finding it difficult to expand operations due to double-digit high benchmark interest rates that pushed lending rates from deposit money banks upward.
In the just concluded week, the exchange rate gap widened to about N362 on each dollar holding, creating brisk business for speculative activities.
Last week, the Nigerian naira was faced with severe pressures across the foreign exchange market as the United States (US) dollar shortage extended while the supply side remained tight.
The development that was witnessed across the forex market badly hurt exchange rates which crossed a new redline severally in the just concluded week.
Importers and exporters access the US dollar from the official window at N808.27 at the close of business on Friday, translating to 5.68% week-on-week depreciation primarily due to a low supply of the US dollar.
Reaching new lows, the official exchange rate had inched near N850 per US dollar while data from Refinitiv showed the exchange rate at N980 earlier last week. The worsening exchange rate underscores the challenges the Central Bank of Nigeria faces in defending the currency, according to analysts.
In the parallel market, the demand remained high, pushing the Naira further into historic all-time lows. By the end of the week, the Naira weakened by 11.43% week-on-week to a historic low of 1,170 largely attributed to speculative activities.
Analysts’ review showed that the spread or forex gap between official and parallel market rates has extended to N361.73 as the naira continues to lose its allure.
At the FMDQ Securities Exchange (SE) FX Futures Contract Market, the US dollar gained strength across various contract tenures against the Naira. For a month contract, exchange rates appreciated by 2.10% to N805.92, two months contracts declined by 2.15% to N816.27 while a three-month contract fell by 2.03% to N824.20.
Investment analysts reported that a six-month forward contract plunged by 1.76% in the week to N852.67 per US dollar while a year contract depreciated by 2.22% to N919.67.
In the global oil market, prices of crude oil crossed $90 per barrel, with potential for further gains after a week of relative stability at around $92 per barrel for Brent.
The fresh upticks came following developments in the global market; including the US-Venezuela deal, allowing US oil companies to resume operations in Venezuela, which could impact global oil production.
Additionally, OPEC’s silence on calls for a Russian oil embargo amid rising tensions in the Middle East raised concerns of increased production, which might exert downward pressure on oil prices.
Nigerian Bonny Light crude oil, however, saw a weekly gain, closing at $98.26 per barrel, up from $95.59 per barrel, indicating a 2.79% gain for Nigeria in the oil market. Analysts at Cowry Asset expect that the Naira will face pressure in the foreign exchange market due to the prevailing market conditions and volatility.
Despite recent policy reversals aimed at enhancing liquidity, the Central Bank’s capacity to defend the Naira against the US dollar appears limited. Speculative activities are on the rise, further boosting demand for the US dollar, the firm said in a note.
Data from the CBN website shows that gross external reserves inched up to about $33.25 billion as a result of inflows spanning three days. Oil exports remain Nigeria’s main sources of forex inflows, accounting for more than 70% of government revenue. Naira Devaluation Deepens Economic Crisis in Nigeria