The continuing drop in oil prices is giving the Central Bank of Nigeria (CBN) sleepless nights. Its inability to meet the huge foreign exchange (forex) demand may lead to a review of the naira pricing policy at the Monetary Policy Committee (MPC) next week, reports COLLINS NWEZE.
In July 2008, when the price of Nigeria’s bonny light hit an all-time high of $147 per barrel, the managers of the economy saw the accrual of petrodollars into government coffers as normal.
Then the foreign reserves rose to $63 billion; foreign exchange (forex) demands were met without problems and the naira was strong. But, today, things have changed. Crude oil prices slumped to below $35 per barrel on January 7, the foreign reserves shrunk to $29.3 billion.
Now, the Central Bank of Nigeria (CBN) is not only unable to meet forex demands, it is churning out policies meant to reduce forex access to importers and real sector operators. The local currency has, reacted negatively, exchanging for N280 to dollar last Thursday.
Since last December, the CBN has kept its official exchange rate unchanged at N197 to the dollar. Against the above, interbank market rate held steady at N199.10/$1 even as electronic transactions with the naira MasterCards exchange at rates far higher than the approved interbank rate.
Managing Director, Afrinvest West Africa Plc, Ike Chioke, said Bureaux De Change (BDCs) and parallel market spread compared to the official market rates continued to widen considerably in the last few months. “Compared to the N197 to dollar peg of the local currency, rates at the BDC segment of the market were as high as N265 to dollar. Irrespective of the dollar sales to BDCs last Wednesday, the rate depreciated by N1 to close at N266 to the dollar and further by N14 to N280 to dollar the next day as huge dollar demands remain unmet,” he said in an emailed statement.
He said in the first four trading days of the year, external reserves had declined by 0.5 per cent year-to-date to $28.9 billion as inflows continue at a lower rate relative to outflows given lower oil prices of $32 per barrel (Brent).
Also, last week, the performance of the Nigerian bond market was mainly bearish as investors free up liquidity to meet up with the speculated bond auction scheduled for the coming week,with increased mopped up and forex intervention provisioning observed.
As a result, average yields closed the week at 10.7 per cent from an average of 9.8 per cent on Monday, last week. The sell-offs in the market was noticed across all bond tenors on all trading days in the week.
Next MPC meeting
Meanwhile, the next MPC meeting is in next week, when there are mixed signals on the direction of monetary policy in Nigeria. The CBN is expected to announce a new forex policy which will give it the flexibility to bring the external and domestic economic variables into equilibrium. This may include the announcement of a new exchange rate band, with a floor of N185 and a ceiling of N220 during this quarter.
The MPC had regretted its decision reduce banks’ cash reserve requirement (CRR) from 31 per cent to 25 per cent during the last meeting.
A report from FBN Quest, a research and investment arm of FBN Holdings, explained that the message from the latest personal statements of MPC members on the policy shift, has only benefited borrowers in sectors with low employment elasticity.
It, therefore, instructed the CBN management to devise regulations and measures to ensure that subsequent cut in the CRR of five percentage points (to 20 per cent) reached employment generating sectors, such as agriculture, infrastructure, solid minerals and industries. The CRR is a portion of banks’ deposit kept with the CBN as reserves.
However, the MPC team said the monetary policy in Nigeria was successful in delivering macro-economic stability until about the third quarter of 2014, though its impact on job creation was negligible. It was then undermined by the latest global headwinds, principally the collapse in the oil prices in the international market.
“One member noted that the prime lending rate stood at about 17 per cent and the retail rate for Small and Medium Enterprises (SMEs) at 27 per cent. Since he estimated the internal rate of return for large and small businesses at 20 per cent and 15 per cent, it is evident why borrowers are struggling. He cited data showing that private-sector credit extension had expanded by only 3.5 per cent year-to-date by end of October and, therefore, far short of the target for the year of 26 per cent,” it said.
The MPC said the consensus, therefore, argued for cuts in the monetary policy rate (MPR) and the CRR to reverse a trend decline in the gross domestic product (GDP) growth. One member notes that more than 50 per cent of banks’ deposits mobilised were not available for intermediation/on-lending before the latest reduction in the CRR. The consensus of statements made the reduction in the CRR “conditional”.
“The statements use different formulae to express a similar message. One refers to aggressive quantitative easing, a second calls for targeted lending and two more advocate the deployment of unconventional monetary policy tools.
‘’Another envisages a rebate mechanism whereby the commercial banks appear to benefit from the reduction in the CRR after they have disbursed to favoured sectors,” it said.
Also, a dissenting voice quotes figures in the CBN’s banking stability report showing that gross lending increased by just N39 billion after the net injection of about N400 billion resulting from the cut in the CRR last September.
IMF suggestions
The IMF boss, Ms. Chrisitine Lagarde, who completed a four-day official visit to Nigeria last week shared her thoughts on how to deal with the challenges facing the economy. She stressed that her visit was only to offer advice and reaffirm the support of IMF to the President Muhammadu Buhari-led government.
Noting that the resilience demonstrated by Nigerians as seen in the outcome of the 2015 general election buttresses the country’s ability to overcome the challenges ahead, she called on managers of the economy to spend wisely in the face of declining crude oil earnings.
She suggested the need for the government to build resilience by making careful decisions on borrowing.
Analysts insist that with a budget proposal to invest, burrowing solely into capital spending, especially in power, infrastructure, housing and transportation, would show that the Presidency is on the right track. Her visit was also meant to give policy makers an opportunity to review their stance on critical issues in the economy within the context of global perception as the country makes hard choices in the year.
Oil: How far will it fall?
Managing Director, Financial Derivatives Company Limited, Bismark Rewane, said the idea of sub-$30 per barrel (pb) oil no longer seems unthinkable.
“In fact, in some circles, it’s a question of when, not if. The Organisation of Petroleum Exporting Countries (OPEC) in its last meeting – which ended in utter disarray – dashed any hopes of a supply cut and even raised the threshold to 31.5 million barrels per day (mbpd),” he said.
Rewane said the immediate impact was more turmoil in the market as Brent crude fell to just below $37pb – lowest level since December 2008 – amid a wider commodities sell-off. OPEC is responsible for 40 per cent of world oil supplies. The lack of any real decision betrays the deep divide within the cartel and it could mean even more pain for some OPEC members entering this year. Some oil producers have the capacity to increase production while some others do not.
He explained that those in the latter category are suffering the most and this has led to strained relations not just within OPEC but between the cartel and non-OPEC producers as well.
“Most traders and analysts are convinced that prices still have further to fall. So where lays the bottom? How much lower can the battle for market share drive oil prices? How long can OPEC hold out? The only sure thing is that more losers than winners will emerge as oil prices test seven-year lows,” he said.
He said despite the challenges, the currency pressures are likely to intensify due to the sharp fall in oil prices. The CBN will continue to intervene in the markets, running the risk of external reserves depletion.
Oil outlook
The outlook on oil prices remains bearish as crude prices are unlikely to rebound with slowing demand from emerging economies such as China, increased production from non-OPEC producers, and a price war among OPEC members.
This has significant implications for Nigeria’s budgetary framework, which is premised on a benchmark oil price of $38pb. Funding options for the government are limited revenue; if oil prices persist in the current downward path, there may be further revisions to the benchmark price. The impact on the external balance will be significant.
The current account balance is estimated to move into a deficit position of -$10.8 billion, (-2.2 per cent of the Gross Domestic Product (GDP) in 2015. This year’s budget assumes a fiscal deficit of N2.2 trillion, a figure that may widen further due to revenue shortfalls.
