Tuesday, 17 March 2020

NIGERIA WEEK AHEAD: IS A NAIRA DEVALUATION ON THE CARDS?

A darker mood awaits emerging markets as concerns mount over how badly the coronavirus outbreak will hit global growth. Central banks across the world are enforcing emergency measures to protect their respective economies with the Federal Reserve cutting interest rates to zero on Sunday. The Bank of England’s emergency 50 basis point rate cut surprised markets last week while the European Central bank deployed new stimulus measures to cushion the economic pain caused by the virus outbreak. With global easing building momentum, emerging market central banks are already taking action but will the Central Bank of Nigeria make a move?

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At this point, there seems to be little faith over the effectiveness of monetary policy to counter the damage inflicted by the coronavirus outbreak and this sentiment continues to be reflected across financial markets. Lower interest rates are unlikely to persuade businesses to invest or households to safe less amid the health crisis. With fiscal measures seen as a better alternative to stabilizing conditions, governments will be under the spotlight moving forward. 

As the MPC meeting looms, investors will be questioning what steps the CBN takes to shield its economy from the virus outbreak. With inflation at 12.13% in January and expected to rise in February, there is little room for the central bank to cut interest rates. Instead, CBN may implement more unconventional tools to stimulate the economy.


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Another question is whether severely depressed oil prices will force the central bank to devalue the Nigerian Naira. Oil prices have depreciated over 50% since the start of 2020 amid the coronavirus outbreak and raging price war between Saudi Arabia and Russia. Foreign exchange reserves in Nigeria decreased to $36.38 billion in February and may drop further if Oil prices fail to recover. 

Earlier in 2020, CBN Governor Godwin Emefiele mentioned that if external reserves drop to between $30 billion and $25 billion, and oil price falls between $50 – $45, the CBN could consider moving on to float the exchange rate and devalue the naira. Are we heading closer to this reality? Time will tell.


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