Naira: Troubled Senate summons CBN gov as reserves rises to $31bn

Suleiman in his lead debate noted with concern the state of the Nigerian economy as it affects the depreciation of the naira.

The lawmaker said he is worried that the naira has depreciated in the last few months at a much faster rate than it had appreciated over the last two years.

Meanwhile, analysts have attributed the rise in the country’s reserves to CBN’s increased efforts to reduced speculative attacks on the local currency, the naira, and falling demand for the dollar thereby increasing accretion to the reserves.

Nonetheless, benchmark crude oil price (Brent) declined 3.8 per cent in the week and 17.3 per cent in a month to $52.57 amidst a continuing global oil glut.

Some pundits tasked the CBN to devise a more stable approach to managing Naira pairing with other major currencies, especially the dollar.

They noted that there have been a series of adjustment from time to time including direct intervention during trading hours by the apex bank to give the naira artificial value that is not backed by performance.

Mr. Jide Famodun, Senior Consultant at Leverage Solutions said; “The true test of the FX policy is its long term orientation. The managed exchange rate approach should be pegged at a level that would make the naira competitive without twisting the policy on a short term basis”.

“But, I don’t see devaluation as solution because we are not producing even those menial products that CBN restricted from accessing FX. This will impact on level of inflation the country will record going forward”; he added.

With the claim that the naira remains overvalued some analysts are calling for another round of devaluation which the apex bank has turned a deaf ear to. It was however observed that CBN’s recent policy which seeks to stabilise and strengthen the local currency is identified to have presently produced some positive development.

The apex bank in its effort to continue defending the country’s local currency has been introducing some FX policies targeted at stabilising the naira from free fall against major foreign currencies.

The Bank had introduced a number of demand-restrictive measures at all segments of the FX market. This has impacted negatively on the capital market as stock market capitalisation dropped precipitously to N10.3 trillion at the end of trading session last week.

The CBN tightening rules includes the closure of the retail and wholesale Dutch Auction System (rDAS/wDAS) window in February 2015 and simultaneous introduction of an order-based two-way quote system in the Interbank market to moderate volatility swing of the local unit, enhance transparency and curb speculation.

Against the backdrop of the FX tightening measures taken by the CBN, there was a reduction in FX utilisation by Deposit Money Banks (DMBs) in the first quarter 2015 as observed from the External Sector Development report released by the CBN last week.

The report showed a 4.9 per cent year over year and 6.4 per cent quarter on quarter decline in FX utilised by DMBs for tangible imports to $8.4 billion; and a 38.1 per cent year on year and 32.0% quarter on quarter contraction in FX utilised by DMBs for services imports to $5.7 billion.

Afrinvest, an investment banking and research firm, said that consequent on the recent exclusion of 41 items from the list of items valid for accessing FX from all segments of the FX market, we expect a further drop in visible and invisible imports FX utilisation in the country in second quarter 2015 and second half of 2015.

This is on the back of the quantum of the newly excluded products, estimated at 20 per cent of total FX utilisation by DMBs in the previous quarter.

According to the investment banking firm, although the CBN suggested it was a measure taken in a bid to encourage local production of these items, it was more of a fall-out of the measures being taken to preserve the external reserves.

An appraisal of the reserves shows that, consequent on the steady rise throughout July, the external reserves added 7.7 per cent between June 24th and July 29th 2015. Equally, in reversal of trend, year to date (YTD) decline in the reserves has moderated to -9.3% ($31.3bn) against the earlier position of -15.8% (US$29.0) as at June 24th, 2015.

Analysts are of the opinion that those 41 items that have been denied access to FX by CBN will have cost implications on consumer goods companies that rely on imported raw materials for production.

Afrinvest said; “Despite appreciation recorded in the parallel market at the end of the week on the back of the CBN restrictions in the FX market, we suggest a further devaluation of the naira at the interbank segment of the FX market to reflect the fair value of the currency”.

In our view, this will boost investors’ confidence, hence a lift in the NSE-ASI performance, the firm added. As increase inflation continues to bite as the economy grapples with a high level of liquidity which perhaps explains the 6-months straight increase in general prices level in the country.

Treasury Bills were oversubscribed last week at the CBN’s open market operation auction as open buy back (OBB) and overnight (ON) rate declined to 4.6 and 5.3 per cent respectively from the previous week.

Also, average rates on Treasury Bills declined by 3 basis points within a week to 13.3%, which is also traceable to the high level of liquidity in the banking system. In a related development, the apex bank policy impacted negatively on activity of Bureau De Change (BDC) last week. The economy witnessed low activity level in the interbank and BDC segment which led to some level of improvement in FX rate in the parallel market as Naira closed at N225 to a dollar as against N243 per dollar.

This impressive result was linked to excess supply of dollar in the parallel market as commercial banks halt acceptance of dollar deposit into domiciliary accounts. “In the week ahead, we expect FX rates to remain stable at the interbank/BDC segment while pressure at the parallel market may soften as activity in that segment of the market further moderate”; Afrinvest projected.