Against the background of growing uncertainty over the Central Bank of Nigeria’s (CBN) capacity to sustain its intervention in the interbank foreign exchange market, analysts at Financial Derivatives Company (FDC) Limited have predicted a boost for the country’s external reserves this month. In a note obtained by New Telegraph, the experts said the expected boost would come from the recent deal reached by OPEC to cut oil production but allow countries such as Nigeria and Iran to produce as much as they can.
The analysts averred that as a result of this deal, Nigeria will enjoy higher oil revenue from higher oil prices, a development they said would bolster the country’s reserves and help reduce the pressure on prices occasioned by forex scarcity. The analysts stated: “Inflationary pressures are likely to reduce in October…
OPEC came to the conclusion of cutting production to 32.5 -33 million bpd. However, countries like Nigeria and Iran were given allowances to produce as much as possible. “Therefore, the country’s reserves are to receive a boost and as such pressure on prices from forex scarcity is to be elevated. This is because the country is to enjoy higher oil revenue from higher oil prices (from OPEC production cut) and production allowance.”
They, however, pointed out that the expected positive impact of the deal would depend on Federal Government’s capacity to ensure that the current cease-fire with militants in the oil rich Niger Delta holds. Nigeria depends on oil for over 90 per cent of its foreign exchange earnings.
But the country’s external reserves have been significantly impacted by the over two years slump in oil prices coupled with the activities of pipeline vandals, which resulted in a sharp drop in oil production. Indeed, data obtained from the CBN’s website last Sunday showed that the external reserves had fallen to an 11-year low of $24.19billion.
Analysts believe that if the OPEC deal does not lead to a sustained increase in the price of oil and the rapid pace of the external reserves depletion continues, the CBN would find it difficult to maintain its daily interventions at the interbank foreign exchange market.
The apex bank had on June 20 lifted its 16-month-old currency controls and auctioned about $4billion on the spot and futures markets to clear a backlog of dollar demand and help boost interbank market trading. Also, on September 28, the CBN settled OTC FX futures contracts on the interbank market to the tune of $180 million.
However, in a bid to defend the naira on the interbank market, the regulator has lately stepped up its interventions in that market. Last Friday, it auctioned two-month dollar forwards to clear a backlog of demand from airlines, manufacturers and other companies. Traders said that in Friday’s one-off special auction, the CBN debited customers’ naira accounts but will deliver the dollars in two months’ time.
“This important one-off exercise is dedicated to the clearance of the backlog of matured foreign exchange obligations,” the Ministry of Transportation said in a statement. The liquidity squeeze on the interbank market has led to many firms closing shop and sacking workers.
Traders said there was no trade for more than four hours after the market opened last Friday, with the currency then offered at N311 to the dollar in a single trade of $500,000 at mid-day. The naira closed at 305 and 307.77 per dollar, according to CBN and FMDQ data respectively. The currency was sold at N460 per dollar on the parallel market.