Central Bank of Nigeria may further devalue Naira

 

The Central Bank of Nigeria (CBN) may devalue the Naira again if the pressure on the currency continues through the first half of 2015.

According to a Macroeconomic and Banking Sector Themes for 2015 report, by Guaranty Trust Bank (GTB), which states that ''as pressure continues to increase in the first half, we expect that the CBN may consider another devaluation within a range of N175-N180 per USD, as reserves and oil prices continue to fall."

Recall that last year November, the CBN devalued the naira from N150 - N160 to one U.S dollar to N160 - N176, as it struggles to preserve macroeconomic stability. It also increased its benchmark interest rate to a record high of 13 percent from 12 percent. But the conditions that brought about the devaluation still exist and may get worse in the coming months. 

Oil prices have fallen to less than $45 per barrel from over $100 in less than a year, and analysts have predicted a further decline as the oil glut which brought about the price crash has shown no sign of ending soon.

Currencies of several emerging economies were hit by the US Federal Reserve's tapering policy, but currencies of oil-based economies such as the naira and the Russian rouble have been hard hit. "The commencement of normalisation of monetary policy by the U.S. Federal Reserve… has accentuated capital outflows," CBN Governor, Godwin Emefiele said last November. As at January 5, the CBN pegged the country's forex reserve at $34.49 billion, a $20 million gain over December, 2014's $34.47 billion. 

The apex bank says rising internal demand for the dollar had been exerting more pressure on the foreign exchange market. This is expected to continue until after the general elections in February.

When the new CBN governor assumed office last year, he promised to gradually reduce interest rates. "We shall pursue a gradual reduction in interest rates," he had said in his presentation.

However, the forces, that necessitated the devaluation of the Naira also necessitated a hike in interest rate. The CBN thus raised its benchmark interest rate by 100 basis points to 13 percent. GTBank however expects it to further increase it by 50 – 100 basis points.