Don't Miss

RenCap insists CBN may be compelled to devalue naira

By BusinessNews Staff on June 13, 2014

In view of Nigeria’s dwindling external reserves as well as an anticipated elevated spending in the run-up to the 2015 elections, the Central Bank of Nigeria (CBN) may be compelled to devalue the naira in the short term, a report has stated.

The report also maintained that 2014 will be another difficult year for the banking sector to deliver earnings growth.

Lagos-based research and financial advisory firm, Renaissance Capital (RenCap), which stated this in its latest report titled: “Nigeria: Emefiele’s Policy Agenda,” obtained yesterday, insisted that in the short term, it would become unsustainable to continue drawing down on the reserves to defend the naira.

It stressed that price stability may be undermined by falling external reserves.

Nigeria’s external reserves stood at $37.034 billion as at Monday. The reserves, derived mainly from the proceeds of crude oil earnings have fallen by $12 billion since its post-global crisis peak of $49 billion in April 2013, to $37.034 billion as at June 9.

The new CBN Governor, Mr. Godwin Emefiele last week unveiled his policy plans. He pledged to continue focusing on price stability and had also argued that Nigeria’s heavy dependence on imports and the pass-through of a weak naira to inflation implies that devaluation will undermine price stability.

The governor plans to maintain the current exchange rate band (N155 +/- 3%) by building up and maintaining a healthy external reserves position. Emefiele had also said he would like a lower interest rate environment.

But continuing, RenCap predicted that the reserves would continue to shrink partly because of heightened import demand, which is typical before an election.

However, it pointed out that unless there is sustained improvement in oil production or price increase in the second half of 2014, it would be difficult for the build-up of reserves to take place this year.

“We think the central bank will be challenged. Lower rates are thus not an option in the short term. Actually, given the risks to the naira from falling reserves, we expect monetary policy to be tightened in the second half of 2014 to support price stability.

“We are projecting a two per cent increase in the policy rate to 14 per cent by the end of 2014. We think there is scope for the easing of interest rates as soon as the end of 2015. By then we expect the devaluation to have been instituted, imported inflation to have dissipated, and fiscal restraint to have returned,” it added.

Commenting on the likely impact of the central bank governor’s policy agenda on the banking sector, it noted it would be neutral in the short term.
What would provide an immediate relief to the banking sector, according to the report, would be the lowering of the cash reverse ratio (CRR), especially on public sector funds.

“We think this is unlikely to happen anytime soon given the pressure on the forex. An increase in the policy rate could help banks with the re-pricing of risk assets, but again the extent of the transfer mechanism is debatable.

“We maintain our view that this will be another difficult year for the sector to deliver real earnings growth. Aside from the elevated CRR, the other headwinds still in place include the AMCON levy and the further reduction in commission on turnover,” it added.

[This Day]

headline