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Naira faces devaluation as oil prices slide further

By BusinessNews Staff on November 15, 2014

The sustained fall in crude oil prices may lead to the devaluation of the country’s currency, the naira, which will spark inflation and its attendant reduction in the purchasing power of Nigerians, analysts have said.

International benchmark Brent crude, against which Nigeria’s oil is priced, on Thursday plunged further and hovered around $79 and $80 per barrel.

The price of Organisation of Petroleum Exporting Countries’ basket of 12 crudes, which include Nigeria’s Bonny Light, stood at $76.96 per barrel on Wednesday, compared with $77.27 the previous day, according to OPEC Secretariat calculations.

The naira has been under some pressure this year, with key contributory factors being portfolio investment outflows in the context of global rebalancing, the abrupt suspension of the former Governor of the Central Bank of Nigeria in February, unaccounted capital outflows and lower oil revenue, FBN Capital noted in its Nigeria Macroeconomic Guide 2014.

A Partner, African Capital Alliance, Mr. Paul Kokoricha, said in a telephone interview with our correspondent that as oil prices continued to decline and the country’s production not increasing, it meant that the capacity to earn foreign exchange would reduce.

“It will result to difficulty in balancing the fiscals. When government finds it difficult to balance its fiscals, it has to do a number of things to make up for the shortfall. For example, it could be by borrowing money from the domestic market,” he noted.

Kokoricha said the second and most important impact was the reduced ability to defend the value of the naira, adding that the government would struggle to defend the currency and that was where its possible devaluation was likely to come in.

“If it (oil price slide) continues for a lengthy period of time, certainly one can foresee a devaluation of the naira. You need those dollars to finance your imports. So, as you run down your reserves and you continuously need dollars to finance your imports, the only way to make up for it is to let the naira fall against the dollar,” he said.

On the likely implications of the devaluation of the currency, Kokoricha said because of the high import dependent nature of the country’s economy, the immediate impact was inflation, which could run into double digits.

“Inflation has been in single digit for quite a long time now. So, we are likely going to see inflation going up to double digits. What that means, therefore, is that it erodes people’s consuming power. Of course, it is a challenge to the entire economy,” he added.

An energy specialist at Ecobank, Mr. Dolapo Oni, said, “I expect oil prices to now head for $73 per barrel, while we produce two million barrels per day. This could pressure the naira towards N180 per dollar.”

The Head, Macroeconomic and Fixed Income Research, FBN Capital, said in an emailed response to enquiries by our correspondent, “We are at or near the bottom in the fall in oil prices. The CBN will be able to maintain exchange rate stability at its auctions because of its cushion of reserves. It may well move the mid-point within the corridor.

“However, it is transferring demand by administrative measures to the interbank market, where the currency is depreciating. Everything changes if there is a sustained further fall in oil price. This is not our expectation. It will bring a sharp devaluation as in Q4 2008 and Q1 2009.”

A former Governor of Lagos State and National Leader of the opposition All Progressives Congress, Asiwaju Bola Tinubu, said in his suggestion on how best to shape economic policies during this period of falling oil prices, “There is no logical reason to peg the flow of naira into the economy to the flow of dollars received. The correct perspective is not to mechanistically restrict naira expenditure to dollar intake.

“The better methodology is to ascertain, then achieve, the level of naira expenditure needed to expand the economy and create jobs without causing inflation to rise to dangerous levels. This is how broadly-shared prosperity is generated in a sustainable manner.”

He said in the face of recessionary headwinds, the government should run countercyclical fiscal policy by using its naira sovereignty to fund fiscal deficits, adding that the deficit was not simply for the sake of running a deficit.

“The fund cannot be spent on non-productive matters. It must be used to fuel infrastructural and other projects that not only employ great numbers of people, but enhance the overall productivity of the economy. To accomplish this, the Federal Government needs to reverse the inimical, ‘dollarisation’ of the national economy,” he added.

[Punch]

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