The dwindling external reserves, which is currently at $43.2bn, has been putting speculative pressure on the naira, latest economic bulletin from the Lagos-based research and financial advisory firm, Financial Derivatives Company Limited, has shown.
The development, according to the firm, may make the Central Bank of Nigeria’s Monetary Policy Committee to consider further tightening the monetary policy instruments.
The next MPC meeting is scheduled for January 20 and 21.
The FDC economic note reads, “In the foreign exchange market, there is an increasing convergence between the parallel and official rate of the naira. The spread of N20 in December is now down to N17. The naira is trading at N173/$ at the parallel market.
“The dwindling external reserves currently at $43.29bn, is putting speculative pressure on the naira. This is likely to tilt the sentiment of the committee towards further tightening.
“There is a lot of uncertainty in respect of the future value of the naira if inflationary pressure eases, the fears may ease along. It is too early to forecast the inflation trend in March/April.”
FDC, however, said that on balance, a marginal decline in the headline inflation was not enough to trigger a change in the MPC’s policy to an accommodative stance.
According to the firm, key macroeconomic indicators “that are on the radar screen of the CBN include external reserves, oil production and fiscal spending.”
The FDC economic note showed that the monetary policy environment had become more politically charged with the impending exit of the CBN Governor, Mr. Lamido Sanusi, in June.
It said, “As we said earlier, the jury is out on the direction of monetary policy in a politically charged environment. Based on normal assumptions, we expect that the monetary stance will remain unchanged or even tighter.
“The Asset Management Corporation of Nigeria’s bonds that have just been redeemed and the need to support the naira suggest that the CBN will be more hawkish. However, in view of the political tension and the lame-duck effect of the outgoing governor, we expect the status quo to be maintained.”
The CBN has been maintaining a tight monetary stance to enable it to defend the value of the naira. In June, the central bank imposed a 50 per cent cash reserve ratio on all public sector deposits with the Deposit Money Banks.
Similarly, in September, the CBN replaced the Wholesale Dutch Auction System with the Retail Dutch Auction System to enable it to control the amount of dollars in circulation. This was also aimed at reducing the pressure on the naira.
Sanusi had said he would defend the value of the naira till he leaves office in June.
Some analysts are of the opinion that the increasing liquidity in the system may make the MPC to increase the CRR from 50 per cent to 75 per cent.
However, the FDC said, “In the event that there is a further contraction by increasing the CRR for public deposits to 75 per cent, the impact will not be as profound as the earlier tightening cycles. This is because of the current excess liquidity in the system. Interest rates in January have averaged 10.71 per cent per annum and will remain tentative till the MPC’s meeting.”
The economic note said the Nigerian Stock Exchange’s rally of 2013 of 47.19 per cent continued but at a more subdued level.
According to the FDC, any tightening instance will bring this rally to a halt and could trigger a correction.
It, however, stated that if rates remained unchanged and there was a further loosening, the current bubble might continue bloating.
Source: Punch (by Oyetunji Abioye)
