CBN may devalue Naira over dwindling foreign reserves, oil decline

160912F_Naira-notesThe Central Bank of Nigeria will probably lower its targeted trading range for the naira as dwindling foreign exchange reserves and falling oil prices undermine its ability to halt the currency’s slide, according to the FBN Capital Limited.

Policy makers may adjust the exchange rate to within a three percentage-point band of 160 per dollar from 155 over the next six to nine months, Gregory Kronsten, an analyst at Lagos-based FBN Capital, said in an e-mailed response to questions.

Lower crude prices are making “it more difficult for the central bank to hold the line on the naira exchange rate,” he said. FBN Capital is Nigeria’s fourth-biggest broker by trading value on the Nigerian Stock Exchange, according to the bourse.

The naira breached the target for the first time on a closing basis on June 7 and has ended trading above the peg each day since June 25 for a decline of 3.1 per cent this year, according to data compiled by Bloomberg.

The naira traded above the band for the first time on a closing basis on June 7 on the interbank market and has ended trading above the peg each day since June 25.

The CBN, which sells dollars at auctions on Mondays and Wednesdays to support the naira, sold $700m last week, compared with $600m the previous week, at 155.76 to 155.79 per dollar.

The CBN Governor, Mr. Lamido Sanusi, in November 2011, devalued the midpoint of the bank’s exchange-rate range at its twice-weekly auctions from N150 .

International reserves of Africa’s second-biggest economy have declined more than two per cent this month to $46.9bn on July 18 as the central bank boosted sales to meet demand amid declining oil prices, the source of more than 95 per cent of Nigeria’s foreign exchange income.

The naira strengthened less than 0.1 per cent to 161.18 per dollar as of 10:56 am in Lagos. The currency has weakened three per cent this year compared with a 0.5 per cent decrease in the currency of Angola, which vies with Nigeria as Africa’s top oil producer.

Two calls to a spokesman for the Abuja-based CBN, Mr. Ugochukwu Okoroafor, were not answered on July 19. Another call on Monday did not go through.

Bonny Light crude, Nigeria’s main export, rose 0.1 per cent to $109.98 per barrel last week. The grade climbed to as high as $120.54 on February 8 and fell as low as $100.31.

Nigeria’s oil output slid for a third month in June, dropping by 70,000 barrels a day to 1.88 million barrels amid theft and damage to infrastructure, the International Energy Agency said July 11.

“The oil price has rebounded lately and looks more supported” even though “crude oil production reached new lows in June,” Samir Gadio, an emerging-markets strategist with Standard Bank Group Limited London-based unit, said in e-mailed comments.

“In the absence of capital inflows over the past two months, the CBN has had to step up its foreign currency auction and direct sales to banks to address the dollar demand-supply mismatch,” he added.

Sanusi held the benchmark interest rate at a record 12 per cent for the 10th consecutive meeting on May 21, to check inflation and stabilise the naira. The Monetary Policy Committee will probably hold the rate when it announces the outcome of its latest decision tomorrow, according to all 14 economists surveyed by Bloomberg.

“Despite the recent moderate decline in foreign exchange reserves, the central bank still has enough ammunition to defend the naira for some time,” said Gadio. “The risk is also that the CBN may be tempted to tighten liquidity conditions further at the next MPC or in coming weeks, although the surprisingly low June inflation rate probably reduces the possibility of a formal hike in the interest rate for now.”

 

Information from Citizen was used in this report.

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