Naira depreciates further in parallel market
MPC to maintain status quo -Analysts
By Babajide Komolafe
THE nation’s external reserves may rise above $36 billion by end of this week, even as the naira depreciates further in the parallel market.
Last week, the reserves rose for the third consecutive week, to $35.765 billion on Thursday May 21 from $35.034 billion on Thursday May 14, translating to week-on-week increase of $731 million.
The reserves have been rising since April 29, following the release of $3.4 billion to Nigeria by the International Monetary Fund, IMF, through its Rapid Finance Instrument, RFI, to support the country’s efforts against the COVID-19 pandemic.
As a result, the reserves, which lost $11.75 billion or 26 percent in 10 months from $45.175 billion on June 10 2019, commenced steady upward movement from $33.427 billion on April 29, gaining $2.338 billion or 6.9 percent in the three weeks ended Thursday May 21.
While this upward trend is expected to continue this week, lifting the reserves past the $36 billion mark, the highest level since March 17, analysts opined that impact of the IMF inflow on the reserves will be short term.
In this regard, analysts at Cordros Securities said: “We still hold the view that the RFI inflow will continue to provide short-term support for the external reserves. Nonetheless, we expect the currency market to remain largely volatile, especially in the parallel as the CBN’s suspension of foreign exchange sales to BDCs continues to create a backlog of unmet foreign exchange demand.”
Naira to depreciate further
Consequently, the naira is expected to further depreciate this week in the parallel market, thus maintaining downward trend for the fourth consecutive week.
Last week the naira depreciated by another N13 in the parallel market due to increased dollar scarcity following the suspension of dollar sales to BDCs by the CBN since March 26, 2020.
According to naijabdcs.com, the live exchange rate platform of the Association of Bureaux De Change Operators of Nigeria, ABCON, the parallel market exchange rate rose to N461 per dollar last week from N448 per dollar the previous week, translating to N13 depreciation of the naira. Consequently the naira has depreciated by N64 from N397 per dollar on March 26th when the CBN suspended dollar sales to BDCs.
MPC to maintain status quo
Meanwhile, the Monetary Policy Committee, MPC, of the CBN is expected to retain its policy rates at the end of its meeting holding on Thursday this week.
Contrary to its decision in January when it raised the Cash Reserve Ratio, CRR, by 500 basis points to 27.5 percent, the MPC at the end of its last meeting in March left all its policy rates unchanged, citing “the need to address the unfolding unfavourable macroeconomic developments, rein in inflation, support growth and employment through the extant interventions and recent initiatives, check capital outflows and support external reserves accretion, and dampen pressure and ensure foreign exchange market stability.”
But in the their various projections on the outcome of the MPC meeting this week, analysts opined that given the continued rise in inflation rate, amidst COVID-19 induced slowdown in economic growth, weak external sector and fiscal position, the rational decision for the MPC is to leave its policy rates unchanged.
According to analysts at Financial Derivatives Company Limited, “At this meeting, the front burner issues will be how to maintain price stability in a COVID-19 situation, weak external position and slowing growth.
“Inflationary pressures are expected to persist in the coming months due to the combined effects of shortages and rising imported inflation as a result of the currency weakness. The most likely rationale decision to take by the MPC in the current market reality is to maintain status quo on all monetary parameters while evaluating the impact of excess liquidity in the market from intervention funds released.”
Analysts at Vetiva Capital Management also stated: “Taking the build-up in inflationary pressure into consideration, we expect the Monetary Policy Committee, MPC, of the Central Bank of Nigeria, CBN, to maintain its current monetary policy stance, amid a rise in external and fiscal risks.
“A rate cut could be counterproductive for inflation, amid a souring economic outlook, while a hike could undermine ongoing efforts to stimulate growth. We believe the CBN will be more focused on the transmission of its unconventional policies to the economy, rather than taking action.”