BY MICHAEL EBOH

Deregulation of the downstream oil and gas sector may likely pose a serious threat to the stability and continuous improvement in the value of the naira, says a financial analyst, Mr. Babatunde Obaniyi.

Speaking on a paper presented at the Finance Correspondents Association of Nigeria’s, FICAN, Bi-monthly forum, titled: ‘Recent developments in the Foreign Exchange market,’ Obaniyi who is the Head, Market Risk, Greenwich Trust Limited, also predicted that Nigeria’s foreign reserves will remain flat or drop lower for the remaining part of 2011 due to the volatility in the prices of crude oil in the international market.

According to him, market reports suggest mixed outlook for the Naira. In the short run, as it is expected that the naira will remain relatively stable, at both official and parallel markets.

“The Central Bank would continue to support the currency in the official market. However, deregulation of downstream oil and gas sector may be a major risk,” he added.

Obaniyi said the market is expected to continue to factor in crude oil prices, as crude oil prices will determine the level of external reserves, which in turn will determine the extent to which the Central Bank can continue to support the naira.

According to him, the weakening global economic outlook implies there is downside risk to the oil price, so there is a strong likelihood that foreign reserves are likely to remain flat, if not lower, until the end of 2011 and the scope for a strong recovery in reserves in 2012 is now smaller.

He commended the efforts of the Central Bank of Nigeria, CBN, in managing the country’s currency, adding, however, that effective currency management should be hedged against economic growth and development to bring about a significant improvement in the value of the naira.

He called for diversification of the economy, making it less dependent on oil and importation, as this will help ensure the growth of the economy, thereby, guaranteeing continuous stability and rise in the value of naira.

According to him, Nigeria’s heavy import dependence explains the country’s high foreign exchange outflows, adding that the long term outlook of the naira is largely dependent on oil production and international price levels, which are mostly unpredictable.

He lamented the current practice of using the country’s foreign reserves to defend the country’s currency, saying that the funds should, instead, be used to address critical infrastructure deficit recorded in the country.

He said, “The foreign reserve should be used to fund infrastructural development, instead of using it to defend the naira. How long can we continue to this, when the roads are bad, no electricity, and other infrastructure that drive economic growth and development are absent?”

He commended the decision of the CBN to diversify a portion of Nigeria’s foreign reserve into the Chinese currency — the Yuan, saying it is a positive move, considering the current state of the United State’s economy and the rising influence of the Chinese economy.

He said the move will reduce the demand for the dollar and positively affect the value and stability of the naira.