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Pressures mount on Naira as external reserves heads below $34bn in April

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By Babajide Komolafe

The downward trend in the fortunes of the Naira last month is expected to persist this month even as the nation’s external reserves is expected to trend below $34 billion for the first time since September 2017.
Last month, the external reserves fell for the ninth consecutive months, shedding N1.135 billion. According to the Central Bank of Nigeria (CBN) the reserves fell to $35.164 billion on March 31st from $36.299 billion on February 28th, indicating month-on-month (MoM) decline of 3.1 percent or a reduction by $1.135 billion.
The Year-to-Date (YtD) decline extended to 8.9 percent or $3.41 billion from $38.595 billion on December 31st 2019.

The decline in the reserves worsened last week as the Week-on-Week (WoW) decline rose sharply by 43 percent to $614 million, the highest since October last year.

Data from the apex bank showed that the reserves dropped to $34.976 billion on Thursday April 02,2020.
The downward trend in the reserves is driven by offshore investors pulling out of the nation’s fixed income market, especially treasury bills, due to fear of naira devaluation and the general flight to safety amongst the international investing community, leading to massive outflow of foreign portfolio investments (FPI) from emerging markets.

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In addition to the above is the sharp decline in the price of crude oil, which accounts for about 90 percent of the nation’s foreign exchange earnings.

The price of Light Crude, the nation’s crude oil grade, on Thursday last week, at $21.41 per barrel, was 60 percent lower from $53.76 per barrel on February 28th, though it had recovered by close of trading the next day.

While the price of crude oil spiked on Friday, with the Light Crude rising to $28.54 per barrel, owing to announcement of possible OPEC meeting to discuss cut in output, the outlook for prices remain uncertain in view of low demand occasioned by the impact of the COVID-19 pandemic.

 

Hence, with oil prices expected to remain low in the short term, and foreign investors apathy to the nation’s fixed income market expected to persist this month, Financial Vanguard analysis showed that the external reserves will fall below $34 billion by the end of this month. This will be the lowest level of the reserves since September 2017 when the reserves ended the month at $33.159 billion.

Naira depreciates further

Driven by the above factors as well as the suspension of dollar sales to Bureaux De Change (BDCs) operators by the CBN two weeks ago, the Naira depreciated significantly at the parallel market and in the Investors and Exporters (I&E) window last week.

The local currency lost N12 at the parallel market as the market exchange rate rose to N414 per dollar on Friday from N402 the previous week.

However, depreciation was less significant at just N1.5 at the I&E window as the indicative exchange rate of the window stood at N383 per dollar on Friday as against N381.5 the previous week.

Some market observers believe the naira will depreciate further this week citing continued low oil prices and impact of COVID-19 on global economic activities.

“In the new week, we expect depreciation of the Naira against the dollars across the market segments amid lower crude oil prices”, said analysts at Cowry Assets Management Limited.

Making similar projections, analysts at United Capital Plc said: “We expect the CBN to maintain its external reserves defensive strategies. Also, in the medium term, we expect pressure on forex rates to continue as the global economic instability continues to hammer Nigeria’s oil earnings”.

On their part analysts at Cordros Capital said: “While we acknowledge that the currency remains under pressure, we believe the CBN’s forex rate alignment and convergence is a laudable move, which should ease pressures on the balance of payment and curtail speculative attacks on the naira.

Notwithstanding, the size of the recent adjustment might not be substantial enough to buy the CBN enough time before an official devaluation.”

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