Analysts Disagree On Naira’s Further Devaluation As Markets Seeks Fair Value
Analysts have sharply disagreed over further devaluation of the Naira despite recent central bank upward review of rates across board after Monetary Policy Committee (MPC) meeting on Tuesday September 27.
While some say that the CBN will be left with no option but to further adjust its official peg of Naira to Dollar exchange rate in the weeks ahead in order to close the obvious gap further widened by its Monetary Policy Rate (MPR) decisions, others are of the view that CBN will achieve nothing by increasing rates but rather should issue equity in order to attract foreign inflows and strengthen Naira value.
After its Monetary Policy Committee (MPC) hiked Monetary Policy Rate (MPR) otherwise called interest rate by 150 basis points to 15.5 percent from 14 percent, and Cash Reserve Requirement (CRR) to 32.5 percent from 27.5 percent, the apex bank adjusted upwards the yield percentage of fixed income instruments across board to compensate for inflationary pressure currently at 20.52 percent in August.
CBN governor, Godwin Emefiele, after last Tuesday MPC meeting said the committee had no choice but to take an aggressive approach to rein in aggressively surging inflationary pressure by further tightening financial system liquidity using the double pronged approach of hike in MPR and CRR.
The following day, the CBN deliberately adjusted interest rates across all classes of government’s fixed income instruments auctioned in its weekly public auction in order to narrow the gap between inflation rate and interest rate on bonds, treasury bills, etc.
The CBN had also instructed banks to adjust their interest rates payable to customers on cash deposits.
Analysts see these measures as signals to likelihood of further adjustment in official exchange rate of Naira to Dollar by the CBN, insisting that the current CBN official peg at N432.80 per dollar does not reflect a fair value of the local currency.
Analysts at Cordros Capital Limited, said in their weekly update report “We think (1) further adjustments in the NGN/USD peg closer to its fair value and (2) flexibility in the exchange rate would significantly attract foreign inflows back to the market,” the analysts concluded in their emailed report.
In view of the tepid accretion to the reserves given low crude oil production level and elevated PMS under-recovery costs, the analysts noted that foreign portfolio investment inflows (FPIs) that historically supported supply levels in the investors and exporters (I&E) window will be needed to sustain foreign exchange liquidity levels in the medium to long term.
They therefore concluded that further devaluation of the local currency was necessary if the apex financial markets regulator desires to significantly attract foreign exchange inflows back into the market.
Of about $300million traded weekly, the CBN has been the key supplier and accounts for over 90 percent of dollar supplies in the forex market. Consequently, there has been accelerated erosion of the country’s foreign reserve as CBN constantly draws down from the reserves to supply dollar to the forex market.
Commenting on market expectation of further official devaluation of Naira by the CBN, the Director General of the Centre for Promotion of Small and Medium Enterprises, Muda Yusuf, said the Naira has already been devalued at the parallel market in spite of the CBN, insisting that a regime of Naira defense has done more harm than good to the market.
He said: “The Naira is already devalued to N720 to N735 to the Dollar, depending on which parallel market you’re buying from. The exchange rate people are operating with is not CBN official rate which is an academic thing with all the corruption going on with it.”
Continuing, the former Director General of Lagos Chamber of Commerce and Industry (LCCI) said: “The CBN does not want to allow market forces to determine foreign exchange rate. Governor Emefiele claims he is defending the Naira and fighting inflation. That is all what he understands. But he is doing more harm to the economy than good.
“Whether CBN likes it or not, fixing official exchange rate is one of the most injurious distortions on this economy, and it has damaged the economy rather than improving it. We all have to endure it until another administration comes in,” the captain of industry lamented.
But Ayo Teriba holds a different view of how the CBN can get to strengthen the Naira instead of fiddling with hikes in MPR, CRR, and interest in fixed income instruments, insisting that even if the local currency is devalued further, it is not going to improve foreign exchange liquidity.
The Managing Director of Economic Associates Limited, said that as chief economic adviser to the government, the CBN should advise government to issue equity rather than sitting down and waiting for export earnings that will never come.
He said “If the CBN wants a stable exchange rate, improvement in foreign exchange inflows, and close the gap between official and parallel foreign exchange rates; if they want to see an appreciating Naira, they should advise the government on expediting action on offering equity investment option,” Teriba told our correspondent over the telephone.
According to him, equity investors will always come because they take long term view of the economy. I’d we want equity investments in the electricity transmission grid which collapses every now and then because we don’t have money to invest in it, investors will invest in it. And we will revive electricity transmission.
“We can get equity investments in railway rather than borrow to develop rail transport system. In the infrastructure space, we can issue a lot of equities, and investors will invest in these infrastructure assets to develop them, and at the same time improve dollar liquidity,” says the economic expert.
He argued that there is nothing the CBN will achieve by devaluing the Naira, increasing interest rates, or interest yield across fixed income assets, pointing out that it was not the first time the apex bank had done so but achieved nothing.
“This is not the first time the central bank has raised the MPR, CRR, or Liquidity Ratio but it has achieved nothing with all that. Why do we continue deceiving ourselves. So, it they want to improve the Naira, they have to get more liquidity. It is a quantity problem. You can’t use MPR to solve essentially quantity problem,” the renowned economist concluded.
In his argument, the issuance of equity has nothing to do with the local exchange rate, rather it is a quantity issue; and whatever the issuer offers as the interest rate is what the investors are most likely to work with because they are interested in the long-term view of their investments.
After the interest rate hike, market operators and investors have been more cautious in trade deals with some of them anticipating equal adjustment in the official exchange rate of the local currency.
After the MPC meeting that saw rates hike, the Managing Director and Chief Executive Officer, Valmond Securities Limited, Tajudeen Olayinka, had told our correspondent that traders were going to stay on the sidelines to watch developments unfold before taking investment decisions.
Similarly, some foreign exchange dealers said that they expected the CBN to further adjust its official exchange rate to narrow the gap between official and black market rates, insisting that the current rate is too far from reality.
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