…As CBN announces MPR decisions today
…Analysts predict N242/$1 by year end
By Nse Anthony-Uko,
ABUJA (Sundiata Post) – The Naira has lost 44.03 per cent of its value against the US dollars within 90 days after the removal of the exchange of N197 at which it was pegged for 16 months.
The Naira closed on the interbank market at N307.25 per dollar on Monday, indicating 44.03 per cent depreciation since the commencement of the free float 90 days ago.
This is as analysts predict a hold on Monetary Policy Rate (MPR) and other indicators, as the Central Bank of Nigeria (CBN) governor Mr Godwin Emefiele announces the decision of the Monetary Policy Committee (MPC) decisions today.
The MPC is ending its two day meeting today and the governor is expected to brief on the outcome later in the day.
However, analysts at Business Monitor International (BMI) Research, a member of the Fitch Group, have estimated that the Naira may strengthen to an average of N242/$1 by the end of this year.
They however predict further depreciation of the naira after in 2017, though the pressure would be moderated as investments begin to pick up and oil prices continue to rise.
Despite strong forecast for the naira by end of 2016, the report however, predicted further weakening in the currency to N298/$1 in 2017 as the macroeconomic imbalances weigh on the currency.
On the other hand, estimate by the Focus Economics Consensus Forecast panellists is less optimistic that the BMI Research as they expect the naira to trade at N291/US$1 at the end of 2016, and N306 per USD in 2017.
The naira has been weakening against the U.S. dollar since June when the CBN scrapped the currency peg that had kept it at high value of around N198 per USD for over a year.
Directly after the peg was abandoned on 20 June, the currency lost over 40 per cent of its value against the USD and fell to N282 NGN per USD.
While the CBN had pledged to move to a free-floating exchange regime, it intervened in the foreign exchange market in the weeks after the devaluation to keep the naira within a narrow range of N282 to N285 NGN per USD.
However, in mid-July, the apex bank reduced its interventions, causing the naira to depreciate further.
On 28 July the currency fell to a record-low of N322 per USD, which marked 14.2 per cent depreciation over the same day in June and a 61.8 per cent depreciation in annual terms. Since then, the naira has been fluctuating at low levels. On 18 August it traded at N321 NGN per USD.
Most analysts agree that the abandonment of the currency peg was long overdue. Greater exchange rate flexibility sparked hopes that the shortage of hard currency and restrictions on imports, which were partly behind Nigeria’s disappointing economic performance in Q1, would ease.
Nevertheless, they believe the country still faces significant headwinds.
The depreciation of the naira prompted the CBN to hike interest rates to a record high in July in an effort to combat rising inflation, which risks restraining economic activity. Ongoing militant attacks on oil facilities are exacerbating the situation by hampering oil production in the country.
Meanwhile, analysts at FSDH Research say they expect the MPC to hold rates at the current levels after today’s meeting.
According to them, “the current economic recession does not support an increase in rates; rather it supports rate cut to boost output,” adding that “on the other hand, the rising inflation rate and weak currency do not support rate cut but a rate increase.”
“However, given the stagflation the country faces at the moment, maintaining rates at the current level may be the best option. We expect the MPC to continue to use the Open Market Operations (OMO) to influence yields to achieve positive real yields on fixed income securities.”
At the end of its July 2016 meeting, the MPC increased the Monetary Policy Rate (MPR) to 14 per cent from 12 per cent, with the asymmetric corridor at +200basis points and -700basis points. However, it retained the Cash Reserve Requirement (CRR) and Liquidity Ratio (LR) at 22.50 per cent and 30 per cent respectively.
The Nigerian economy officially entered into a recession when the National Bureau of Statistics (NBS) released the Q2, 2016 Gross Domestic Product (GDP) figures. The real GDP contracted by 2.06 per cent (year-on-year) in Q2 2016, compared with the growth of 2.35 per cent in Q2 2015. The NBS earlier reported a GDP contraction of 0.36 per cent in Q1 2016, leading to two quarters of GDP contraction.
The oil sector recorded a decline of 17.48 per cent, compared with the decline of 6.79 per cent recorded in Q2 2015. The oil sector contributed approximately 8.26 per cent to the real GDP in Q2 2016, lower than the 10.29 per cent contribution in Q1 2016. The non-oil sector recorded a contraction of 0.38 per cent in Q2 2016, compared with the growth of 3.46 per cent in Q2 2015; and the negative growth of 0.18 per cent in Q1 2016.