The currency fell to a new record low against the dollar earlier in the week, but even after gaining some strength on later on, thanks to the Central Bank of Nigeria’s (CBN) intervention, it closed on a flat yesterday.
With the Naira unable to achieve any stability this week despite its devaluation the previous week and several CBN interventions, here are some things we learnt about the Naira in the past five days.
The Naira’s Struggle Will Not End Anytime soon
The Nigerian naira closed at 180.1 to the dollar yesterday, the same level as its previous close, after the central bank stepped into the market to sell the U.S. currency to some commercial lenders. But the Nigerian currency remains below a new target band of 160-176 to the dollar, set by the Central Bank last week after it devalued the currency by 8 percent.
Monday and Tuesday were the worst days; after
falling to a record low of 184.10 at the close of Monday trading, the Naira opened at another record low of 187.55 on Tuesday. Despite its relative rebound since then, the local currency is not yet out of the water. This is because the problem that have caused the Naira to fall in the first place are still inherent.
Since global oil prices continue to fall, the recovery of the Naira is not foreseeable in the nearest future given that oil exports contribute about 95 percent of Nigeria’s foreign exchange. Analysts at Renaissance Capital predict a value as low as N197 to a dollar in 2015. But even that estimates seems optimistic, given the fact that currently a dollar goes for even higher than N190 in the black market.
Nigeria’s upcoming election is another occurrence that does not bode well for the troubled currency. Investors’ negative speculation of political tension coupled with socio-economic challenges like insurgency and frivolous spending by politicians are all collaborating against the Naira’s value.
With such pressure on the currency, there are potent fears of a double digit inflation, which for the past two years has stabilised in single digits for the first time in more than five years.
There is No Quick Solution to the Naira Crisis
In retrospect the Naira crisis could have been averted, but now it sadly has no single one stop solution bar an immediate spike in global oil prices. This obviously will not happen. The CBN’s spending of over $250 million to shore up the naira has not stopped the currency’s bleeding. Since June, the Naira has fallen over 11 percent to the dollar.
Had the country’s government saved the surplus of its oil benchmark price when global oil prices stood at over $100 per barrel (and Nigeria’s benchmark at under $80), then Nigeria would have excess crude savings to, at least, effectively delay the revenue crisis, just like Saudi Arabia.
Also, economic diversification, which is the perfect solution to the crisis, does not happen overnight. Moving Nigeria from an oil dependent state- the main reason for which the Naira is currently suffering- requires an economic overhaul, which can only take place in processes and time to yield the needed results.
Thus, the Naira crisis can only be managed not solved. This is testified to by the measures of the CBN which are all geared to stabilizing the local currency, but are of no expectation to rise back to its pre-oil crisis value.
However, analysts say if the CBN finds itself in the position where it is drawing on Foreign Exchange reserves to finance Nigeria’s balance of payments (BOP) and needs to defend the Naira in a low oil price environment, there is a risk that it may be forced to loosen its hold on the Naira, implying further currency weakness.
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