Business Nigeria: How CBN Can Hold Off Naira Devaluation Till After General Elections- Rencap

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Due to the oil price crash and political instability in Nigeria, there is continuous pressure on the naira and continuous erosion of the country's foreign reserves.

Analysts says the Central Bank of Nigeria is under intense pressure and expect the apex bank to devalue the Naira before the general elections, scheduled to hold in six weeks.

However, a Renap report says "a formal devaluation will be avoided until after the elections. We expect the CBN to move the mid-point of the official exchange rate band to above N200/$1. This would imply an interbank exchange rate close to N220/$1.”

The report said that even if the Federal Government is bent on avoiding outright devaluation because of the likely response from members of the public, a form of capital controls is urgently needed.

Rencap therefore said that “to hold off devaluation, we think Nigeria may require soft capital controls, which would lead to FX liquidity getting squeezed again.”

“This increases the risk of JP Morgan removing Nigeria from its key emerging currency bond index (JP Morgan will assess Nigeria’s place in the index in 2Q15) and FX reserves falling to such an extent that current credit ratings come into question.

"Our most plausible alternative scenario (30-40% probability) is that the CBN will loosen its hold on the naira before the 28 March elections. It would do this by allowing the naira to weaken on the official FX market (as it did in November, before the 8 per cent devaluation), which would translate into corresponding depreciations in the interbank and bureau du change markets. We believe this would help the CBN to stem the fall in reserves.

#Nigeria #CBN #Rencap

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