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HomeMisc NewsMarkets ReportWho will save the Nigerian currency against the almighty greenback?

Who will save the Nigerian currency against the almighty greenback?

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By Oludare Mayowa

The country’s currency has depreciated by around 3.68 percent in November alone as demand for the greenback keeps mounting and the Central Bank of Nigeria (CBN) has been helpless in meeting genuine demand for hard currencies.

The naira traded around N478 to the dollar on the parallel market on Friday, weaker than N461 to the dollar it traded on the first trading day of the month. The fall of the naira against the dollar was driven by growing demand arising from importers’ inability to access enough dollars to meet their needs.

Equally, the regulatory bank has been struggling to meet demand for the greenback from importers and offshore investors wanting to repatriate their funds back to their home countries as the impact of the Coronavirus pandemic bites harder across the globe.

The sources of dollar inflow in the country have been problematic as a result of the disruption in the global supply chain necessitated by the advent of the Covid-19 and its attendant impact on demand for crude oil by industrial nations.

From the look of things, the CBN may further devalue the naira against the dollar before the end of the year to help stem pressure on the country’s foreign exchange reserves which have declined by 11.20 percent year-on-year to $35.50 billion by November 19 from $39.98 billion last year.

The choice before the regulatory bank seems to be limited considering the fact that since the advent of Covid-19, crude oil prices have tumbled and has not fully recovered as the deadly disease had continued to negatively impact the global economies, cutting demand for oil.

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Nigeria, Africa’s biggest economy depends largely on oil exports for 90 percent of its foreign exchange earnings and about 60 percent of total revenue from the same commodity.

What this translates to is that a weak outlook for the global oil supply would readily impact negatively on the performance of the country’s economy.

Analysts said the naira will continue to depreciate on all the segments of the market unless there is an improvement in the global prices of crude oil and offshore portfolio investors returning back to invest in the country.

While there are signs that the global oil prices have shifted and improved significantly from the lowest point it was earlier in the year to a new level due to the efforts of the Organisation of Petroleum Exporting Countries (OPEC), the immediate return of offshore portfolio investors may not be guaranteed for now.

What usually attracts offshore investors into the country are the twin of positive economic outlook and attractive interest rate and both are missing in the economic mix of the country as of today.

The low or near-zero interest rate regime prevailing in the country, coupled with the instability in the exchange rate regime are not positive signals that could lure foreign investors into the country.

Though the CBN Monetary Policy Committee (MPC) is slated to meet this Monday and Tuesday, it is unlikely the monetarists will alter the benchmark interest rate, which they suddenly dropped at the last meeting to 11.5 percent even against the prevailing inflation rate of 14.32 percent as of last month.

What this also means is that cheaper naira will be available to chase the fewer dollars in the market, put more pressure on the local currency and the resultant effect of that is further depreciation of the naira.

Invariably, the local currency will continue to be under pressure as long as the CBN is unable to meet even genuine demand on the domestic market and the reason to officially devalue the naira will be provided and the vicious cycle will subsist.

As the situation is today, the country is not doing much in terms of recalibrating the economy to ensure that local content is developed to discourage dependence on imported goods and conserve foreign reserves.

All the noise about local production of rice and other staple foods has remained what it is, more foreign rice are been smuggled into the country while Nigerian taste for foreign products still remains strong.

The bulk of the Anchor Borrower Programme (ABP) intervention funds, meant to boost agricultural production has gone to people who have nothing to do with farming, according to a Nigerian Economic Summit Group (NESG) report.

The economic environment has remained harsh despite efforts by the government to promote ease of doing business through tax waivers for small businesses. Issue of corruption has continued to hamper the success of government policy to ensure improvement in the ease of doing business in the country.

Also, the ABP was designed without putting into consideration the foreign exchange content needed to import machinery and other input that will support local production of rice and other grains.

At the end of the day, many people who collected the money have to reinvest it in short-dated fixed income or use it to buy up the dollar on the parallel market to hedge against loss.

Consequently, this has rendered the impact of the programme on the economy ineffectual as the level of production has not been optimised because of the inability of borrowers to access dollars from the official market to procure plants and machinery for production.

More efforts are expected to be made to ensure that government programmes to support local production of goods and services get to the right people while creating enabling environment to ensure the security of lives and investments.

Also, the government should work hard to fix electricity, security and build social infrastructure and other factors hindering growth in the economy to ease off the pressure on all economic agents and ensure that they perform optimally.

Whatever decision that would be taken at next week’s MPC meeting, may not have an immediate impact on the state of the naira, but it could influence the decision of investors, importers and other economic agents going forward.

It is therefore wise, to expect that the monetarists will take cognisance of the prevailing condition of the local currency in arriving at quick-fix solution to price stability in the country.

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