Monday, 11 January 2016

External pressure may force FG to devalue Naira

The Federal Government may soon lose its current battle to defend the Naira using capital controls, as huge external pressures continued to deplete the nation’s foreign reserve.
In just a few days last week, Nigeria’s external reserve lost a whooping
$112million, even though the Central Bank of Nigeria (CBN) had already shut out about 41 items from its foreign currency windows.

 But the current pressures on the President Muhammadu Buhari government seemed to have been intensified after the International Monetary Fund (IMF) delegation led by its Managing Director, Ms Christine Lagarde, ended its four-day official visit to the country,
where fiscal/monetary policy flexibility and subsidy related issues topped the agenda.

The IMF president, who said, ” I am not in Nigeria to negotiate loans with conditionality,” had, however, advised the authorities that to build the external reserve, the regulators have to make additional exchange rate flexibility, either up or down to help soften the impact of external shocks. She also urged the government to further raise its VAT rates, stressing that Nigeria currently pays one of the lowest rates in Africa.

But despite assurances by both the CBN Governor, Godwin Emefiele and President Buhari to resist pressures to further devalue Naira after about 27 per cent devaluation in the last one year, indications are that they may be forced to capitulate soon to secure the global business community’s support for the 2016 budget.

This is more so as the Nigerian government intends borrowing an estimated N900billion from the international financial market to finance its NI.84trillion deficit, which stakeholders believe may not be feasible if it totally rejects the IMF’s advice. That perhaps, may be a major consideration for more devaluation in the months ahead.

Already, against the backdrop of its falling revenue profile, Nigeria’s foreign reserve took a big hit last week losing a whopping $112million to close at $28.960billion despite government’s capital control imposed since June 2015.

The $112 million fall in the nation’s reserve, which was about the highest since the CBN began implementation of the bank verification number (BVN) for forex transaction.

Managing Director, Chief Economist, Africa Global Research of Standard Chartered Bank, Razia Khan, has said the renewed downward pressure in Nigeria’s external reserve balances and falling oil prices call for a move to more liberalised FX regime, as Nigerian businesses suffer in an increasingly FX constrained environment.

She hinted that although no official FX assumption was mentioned in the budget, many believe that Nigeria will need a weaker FX rate to meet its official deficit goal of 2.16per cent of GDP in 2016.
Khan also noted that the inflation outlook will be an important driver of the policy decisions taken by the Nigerian authorities in the coming weeks, as well as the likely sequencing of economic reforms since the $38 per barrel benchmark used by President Buhari for the 2016 budget is already under threat with Brent crude selling at about $33 per barrel last week.

On the other hand, the Managing Director, Cowry Asset Management Limited, Johnson Chukwu, lamented that the danger associated with the sharp drop in reserve was that it might fall to a certain threshold where the country may not be able to meet its foreign currency obligations.

According to him, this could trigger loss of confidence by the country’s trade partners, who may insist on cash collateral/cover before establishing letters of credit for Nigeria’s importers.

He explained: “The drop in the foreign reserve may not be unconnected with the negotiation of letters of credit established for the importation of PMS, which were funded from the N413billion allocated to payment of petrol subsidy in the recently approved supplementary budgeted. Other factors that may have contributed to the outflow include remittances of proceeds of ticket sales by airlines and payment of other matured foreign currency obligations.”

Chukwu, however, expects that the government will take appropriate measures to diversify the sources of the country’s foreign exchange earning.

Similarly, another analyst at WSTC, Olu Oni, explained that the danger associated with the depletion of reserve is that it will continue to aggravate the pressure on exchange rate, as it also affect perception about the ability of our financial institutions to meet FX obligations.

He noted: “At a time other countries are building back reserve, Nigeria has increased its consolidated spending without a corresponding increase in generating revenue.

With respect to the 2016 budget, he said that the declining oil prices, already below the 2016 budget assumptions, will, no doubt, put pressure on the performance of the budget if oil price stays at the current level for too long.

According to him, the ability of the Federal Government to achieve its ambitious revenue projections from the non-oil sector amid current restrictions on access to FX, also remains a major concern.

“We do not think the CBN will wait till reserve is completely depleted before it does the needful. We believe economic exigencies will eventually trump political considerations as regards the resolution of the lingering currency crisis,” he said.

But CBN Director of Communications, Mr. Ibrahim Mu’azu, who spoke to Daily Sun on telephone, allayed fears Nigeria’s reserve was experiencing any unusual erosion that could threaten her 2016 budget. He described the observed movement as normal trends that should not panic anyone.
According to him, the movement of reserve for any economy is determined by volume of trading activities (inflow/outflow) and the domestic currency, but the cross rates of the convertible currencies at the international financial market.

However, financial experts who spoke to Daily Sun, insist on diversification of the economy, devaluation and a move to a more liberalised FX regime, without which the country may not be able to meet its foreign currency obligations and scare away investors.

Also reacting to the development, the Head of Equity Research at FBN Capital Bunmi Asaolu, stated that the obvious danger associated to the drop in reserve was devaluation of the nation currency, but has implications for growth in general.

“The whole reserve will not be completely drained because the government will not want to do that. The obvious step is to pass on the pain by devaluing the currency. That will reduce demand for Us dollars since the devaluation will make the dollar a lot more expensive for Nigerians/Nigerian businesses,” Asaolu stated.

While he dispelled fear of threat to the economy, Asaolu hinted that it will require the government to reduce its spending plans, borrow more or accept a higher deficit.

President of Constance Shareholders of Nigeria, Mallam Shehu, identified that the challenges militating against stable foreign reserves have been discovered to include volatility of foreign exchange inflow, fiscal federalism, development of productive non-oil economy exploit, natural challenge and training and retention of staff.

He suggested that the solution, therefore, was for all three tiers of government to imbibe the culture of corporate governance by ensuring proper accountability and transparency in managing their allocations of federally collected revenue.

According to him, unless Nigeria manages to accumulate a stronger fiscal reserve – major compensating increases in non-oil revenues (IGR), macroeconomic stability faces major external risks and government budgets may experience increasing pressures in coming months.


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