Nigeria’s currency may be devalued in 2015 as forex reserves reduces and the naira feels the pressure following the US Federal Reserve’s tapering policy, a recent research indicates.
The research by leading Emerging Markets & Frontiers investment bank, Renaissance Capital projects an $8 billion decline in Nigeria’s forex reserves.
The report was released after the company’s 5th Annual Pan-Africa Investor Conference in Lagos, Nigeria where the country’s Central Bank governor Sanusi Lamido Sanusi spoke on investors’ concerns about the naira.
Sanusi said he believes Nigeria has nothing to gain from naira devaluation. But devaluation looks likely to happen in 2014 as the currency remains under pressure from US tapering and the Central Bank expected to get a new governor who would be desperate to stabilise the naira as Sanusi whose term ends in June is replaced.
According to the RenCap report, “forex reserves would have to drop significantly for the new CBN governor to devalue the naira”. The investment firm noted that the last time naira was devalued was in 2011 following an $11 billion drop in foreign reserves.
RenCap forecasts an $8 billion drop in foreign reserves in 2014 to $35 billion, but believes it may not be enough decline for the CBN to devalue the naira. It noted however, that “if forex reserves fall to $30 billion, ceteris paribus, our naira econometric model forecasts a sharper depreciation to NGN168/$1 at YE 14…the new CBN governor may be compelled to adjust the naira exchange rate band to NGN160-170/$1”.
Foreign exchange reserves is expected to decline further in 2014, with sub-par oil production, higher imports due to election-related spending coming ahead of the 2015 general elections in the country.
Oil revenues dropped in 2013 due to oil theft and illegal bunkering activities in the country. The decline in forex reserves had since continued following a post-global crisis peak of $49 billion in April 2013.
With a weak external position in 2013 and 2014, devaluation in 2015 becomes apparent. The devaluation is expected however after the 2015 elections as RenCap noted that “a devaluation before the elections would be unpopular for an import-dependent nation”.
Although Nigeria’s central bank governor believes devaluation would be bad for Nigeria, but wouldn’t a weaker naira mean more naira from oil tax revenue which is paid in dollars?
However, while the government may get more from tax revenue, importation becomes more expensive and with the poor state of the country’s oil refineries, it seems doomed to losing money via oil importation.
Despite Nigeria’s insistence on lowering imports in certain sectors, local production remains inadequate to meet domestic consumption. With devaluation expected to increase importation costs, the country might struggle to maintain a healthy trade balance, which could lead to greater external borrowing and higher inflation.