Foreign exchange analysts at Ecobank have predicted that the Naira may drop further to N320 to a Dollar at the official interbank exchange rate in 2017.
They fear that foreign exchange restrictions are likely to remain in place given the weak global oil prices outlook.
The financial experts in a report noted that “only a moderate rise in oil prices and as government spending is set to rise, significant import demand in an environment of depleting foreign exchange reserves suggests further import demand suppression in the near term.”
The report stated that the recent Central Bank of Nigeria (CBN) decision to move to a flexible exchange rate has set the economy on the right path to recovery, but exchange rate pressures will persist due to expectation of continued low oil prices, still low Foreign Direct Investment (FDI) inflows, foreign exchange reserves depletion, robust import demand, and tightening global financing conditions.
“Amid these factors, we anticipate further devaluation of the Naira in the short term.
“This should help the Naira to converge, providing greater price transparency which will help to attract more investment inflows, reduce the rate of depletion in foreign reserves, boost foreign exchange liquidity and revive trading activity,” they explained.
They noted that CBN recently adopted exchange rate policy will relieve some pressure on foreign exchange reserves, which have declined 16 percent to $25billion from a year ago to defend the Naira peg to the dollar.
According to the Ecobank research team, “At present, CBN’s intervention in the interbank foreign exchange market appears to be less aggressive compared with immediate weeks following the adoption of the new exchange rate policy.
“However, ongoing weak oil receipts and low investment inflows, which account for the country’s main sources of foreign exchange, suggest that the CBN will remain the main supplier of liquidity in the market undermining any prospect for a significant build-up in foreign exchange reserves to pre-crisis levels.”
They noted that inflation rate, currently at 18.48 per cent as at November is likely to ease slightly in the coming months but will remain elevated.
“The recent slowdown in core inflation points to lower price pressures in the coming months–price pressures will ease slightly on the back of higher base effects but ongoing tight foreign liquidity, production constraints, higher utility and transport and food prices will keep inflation elevated (above CBN’s inflation target range of 6-9per cent), they explained.
They said CBN’s Monetary Policy Rate (MPC) will likely remain high at 14 per cent, and given ongoing market uncertainties, specifically concerns over inflation and exchange rate in a low oil price environment, and the need to ensure positive real returns on assets, the scope of a further hike is high.
On the N7.3 trillion 2017 proposed budget, the group said, “While our 2017 oil price projection is above the Federal government’s oil price benchmark (above $50 b/d), potentially increasing oil savings, we expect oil production to remain below 2.0mn b/d in 2017 owing to our expectation of further disruption in oil production in the Niger Delta.
“This will limit prospects for overall foreign exchange liquidity and government tax revenue.
“As a result, we expect a higher-than-expected budget deficit (as opposed to the 2.18per cent of Gross Domestic Product (GDP) proposed under the budget) which will sustain strong foreign exchange demand.