The decline in foreign exchange reserves which dipped to $39.2 billion is threatening the naira, The Nation has learnt.
For two years the naira exchange rate against the dollar and other currencies has been stable.
A member of the Central Bank of Nigeria (CBN)-led Monetary Policy Committee (MPC), Prof. Adeola Adenikinju, who observed the new trend, warned that unless certain conditions are addressed, the national currency will be in trouble.
In a statement to the CBN on the MPC Meeting, Adenikinju, who is Research Professor at the Centre for Econometrics and Allied Research, University of Ibadan, said the fall in foreign reserves and deterioration of current account balances are red signals indicative of difficult time ahead for the naira.
Market data showed that the naira depreciated at the Investors’ & Exporters’ (I&E) windows by 0.49 per cent to close at N363.49/$ from N361.7/$, but the currency was exchanged at N306.95/$ in the official market.
The naira-dollar exchange rate at the I&E window remained stable since April 2017 at N360 – $1. There were also significant convergence in the exchange rate across the various market windows until current volatility set in.
Gross external reserves declined further by 1.16 per cent to $39.24 billion from $39.7 billion at the beginning of the month. Although the reserves had peaked at $45 billion in July 2019, the current decline have led to a reduction in Nigeria’s import cover from 9.88 months to 9.77 months.
Adenikinju explained that although the foreign exchange rate markets remained relatively stable at both the Bureaux De Change and the Investors’ & Exporters’ (I&E) windows, the weak performance of the current account balances, fall in foreign reserves and the small margin between oil price and the benchmark price for oil, imply that there could be increasing pressure on the naira in the medium term if the existing conditions subsist.
The MPC at its November 26, 2019 meeting predicted that the on-going monetary accommodation in key advanced economies like the United States implies that further appreciation of the dollar may have reduced. But possible weakening of the dollar is not expected to lead to more capital flows for Nigeria given the the rise in the U.S. yield curve, which signifies a return of attractiveness in dollar-denominated assets.
The implication is that Nigeria might experience more portfolio outflows in the foreseeable future, which may impact negatively on external reserves and the stability of the naira.
Adenikinju said Nigeria’s current account balance also weakend between the second and third quarters of 2019 adding that the fiscal space also deteriorated due to rising fiscal deficit.
“Government revenue underperformed relative to budget, while expenditure rose above the budgeted sum in the first half of the year. The equity market also continues its downward trajectory in the third quarter of the year. All-Share Index (ASI) declined by 14.12 per cent to 16,991.42 index points on November 22, 2019 from 31,430.5 index points at end December 2018,” he said.
He added that the financial system indicators (FSI) trend was generally positive. “The non-performing loans (NPLs) was particularly encouraging. NPLs ratio declined from 9.4 per cent in August 2019 to 6.6 per cent in October 2019. It is hoped that the trend will continue. Total operating cost to operating income of banks also declined from 67.4 per cent in August 2019 to 66.9 per cent in October 2019, suggesting more efficiency in their operations.,” he said.
According to him, loans and advances as share of banks’ assets rose by two percentage points from 33 per cent to 35 per cent between May and October 2019. Gross credits rose by nearly N1 trillion between October 2018 and October 2019.
He added that the economic output growth retains its fragile, but positive trajectory in the third quarter of 2019, with a 2.28 per cent growth compared to 1.81 per cent recorded in comparative period in 2018.
“This makes it the fourth consecutive quarter that real Gross Domestic Product (GDP) has posted a growth above two per cent with the growth in GDP was driven mainly by the oil sector. The increase in electricity generation by 4.4 per cent in the third quarter also contributed to the improved performance recorded in the GDP. Headline inflation (year-on-year) rose to 11.61 per cent in October 2019, from 11.22 per cent in September 2019,” he stated.
He added that more sectors of the economy benefitted from the increase in lending, with the manufacturing sector, retail and consumer credits recording the highest increase.