Is Another Adjustment to the Naira on the Way?

Is Another Adjustment to the Naira on the Way?
Recall our 10th March, 2020 report on “Crude Oil and the Naira” where we explained the economic realities of present and how it is related to the situation in 2016. About two weeks after publishing the post, the CBN devalued the currency by 15% even though it termed it “Adjustments”. With the adjustments, official exchange rate became N360/$ from N307/$. At the Importer and Exporter (I&E) window, the naira was adjusted by 5% to N380/$ from N360/$. Furthermore, CBN now sells dollars to the BDCs at the rate of N378/$ while it expects the BDCs to sell to the end users at rates not more than N380/$.

Based on the data obtained from the CBN, the gross external reserve shed $525.91 million in January 2020 while it declined by $1.58 billion in February. In March 2020, the gross external reserve depleted faster than expected by $1.10 billion and in April, the gross external reserve was depleted by $1.55 billion even as the CBN suspended the sale of dollars to the BDCs as well as temporarily suspending cheque clearing. The external reserve as at May 7 was $34.19 billion.

On 8th May 2020, the FMDQ announced upward revision for all new forwards with the 6 months FX rate revised to N403/$, 1 year FX forward rate revised to N421/$ while the 5 years futures rate was revised to N570/$. The 5 years futures contract was introduced by the FMDQ on 13th February 2020. This was introduced in order to reduce potential FX exposures, encourage long-term planning and increase investments in the financial markets of the country.

Our View
With the rate of depletion in gross external reserve, we believe the reserve will hit the $30 billion cap by August, other things being equal. In our 30 April 2020 report on “Oil Price and FAAC”, we also note that due to the current Domestic Crude Allocation (DCA), Nigeria receives payment for its crude oil export after 90 days of sales. This therefore means that the March oil price crash will be reflected in government revenue and CBN reserve by June. Furthermore, adjustments to the forward rates indicate possible devaluation to make the spot rate (almost) equal to the forward rates.

Download full report here Is Another Adjustment to the Naira on the Way