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External reserves may drop below $30bn – Analysts

By on January 7, 2015

The continuous decline in the global prices of crude oil may lead to the further depletion of the country’s external reserves to below $30bn by the end of the second quarter of this year, analysts at BGL Plc have predicted.

The analysts, in their economic report detailing the outlook for 2015, stated that the unfolding oil price scenario and the consequent exchange rate depreciation would further put pressure on the external reserves over the next few months.

The price of Brent crude, against which Nigeria’s oil is measured, fell to $53.03 per barrel on Monday, while the Central Bank of Nigeria put the external reserves at $34.49bn

But the report, a copy of which was made available to our correspondent by the Head, Research and Strategy, BGL Plc, Mr. Femi Ademola, stated that if the reserves continued to decline, it would be difficult to have an acco mmodating monetary policy.

It stated, “The reality in the economy suggests that the monetary policy will be non-accommodating in 2015. This would be dictated by the eventual trend of the oil price and the consequence effect on the government’s primary balances, foreign exchange rate volatility and the foreign reserves.

“The current level of external reserves at $36bn can cover seven months of imports. However, this would deteriorate to below $30bn before the end of the second quarter if the oil price trend continues below the $65 per barrel.

“At that level, no monetary reversal is expected regardless of the pro-growth and pro-employment stance of the governor of the CBN”

The BGL analysts also predicted a further increase in interest rate in the most part of this year if macroeconomic stability was threatened by inflation, low oil price and weak foreign exchange.

For instance, they said a further increase of 14 per cent in late 2015 was plausible, noting that the decision of the Monetary Policy Committee of the CBN to depreciate the naira would reduce demand pressure on the exchange rate, especially coming from speculations.

As an import-depended country, this, the report noted, would lead to increased costs of raw materials and finished products, and consequent increase in general price levels.

While this may force the country to consider domestic substitutes, the report explained that the structural defect in the economy would make imports to continue to be cheaper than locally-made goods.

 

[Punch]