The Nation||The continuous decline in foreign reserves and increased spending expected during 2015 elections are likely to force the incoming Central Bank of Nigeria (CBN) Governor to devalue the naira, Global Chief Economist, RenaissanceCapital (RenCap),Charles Robertson firm has said.
In a report titled: Nigeria/ Kazakhstan comparison and Sanusi oil sally, he said the cumulative deterioration in the external reserves position last year and this year implies devaluation next year, after the elections.
Robertson, however, doubts devaluation before the elections, saying such an act would be unpopular for an import-dependent nation.
“We assume foreign exchange reserves will fall from $44 billion in 2013 to $35 billion this year – a decline of $9 billion.That would imply greater weakness than our current 164 to dollar end-year assumption. But we expect the CBN to counter-act this, by tightening monetary policy,” Robertson said.
However, he said the foreign reserves would have to drop significantly for the naira to be devalued, adding that the last time the CBN devalued the naira was in 2011, following the $11 billion drop in foreign reserves.
Continuing, he said: “We believe reserves will likely fall further in 2014 on the back of subpar oil production and higher imports due to election-related spending. We think the cumulative deterioration in Nigeria’s external position in 2013 and 2014 implies devaluation in 2015, after the elections; a devaluation before the elections would be unpopular for an import-dependent nation. We think a N160 to 170 to dollar target range is likely. One upside for the government from a weaker naira would be more naira from dollar oil tax revenue,” he said.
The global economist explained that the CBN Governor, Sanusi Lamido sees no advantage in devaluation.
“He highlighted his hawkish stance when sharing with us his that he voted for an increase in the cash reserve ratio (CRR) on private sector deposits at the January Monetary Policy Committee (MPC) meeting; however, he was outvoted by other Monetary Policy Committee members. A CRR hike at the March MPC is a real possibility. This stance is contrary to a central bank that may be considering a weaker naira,” he stated.
He continued: “Although our base case is for no devaluation in 2014, there is a risk that the new CBN governor may devalue the naira, as Kazakhstan’s new central bank governor did in February 2009.
“Like Kazakhstan, Robertson said the naira came under pressure recently from the United States’ Federal Reserve’s tapering policy, and its current account surplus is likely to decline as imports rise in the run up to the elections.”
The foreign reserves declined to $43.5 billion as at January 2, as petroleum and food imports soared. The reserves which stood $45.4 billion on September 30, last year, have maintained steady fall in recent months.
The level of Nigeria’s external reserves has fallen precariously low to $43.63 billion as at December 30, last year. This is the lowest level since November of the previous year and a decline of 10.7 per cent from last year’s Year to Date peak of $48.86 billion.