Home Analysis Naira may continue to fall

Naira may continue to fall

by Business News Report

The pressure on the naira at the foreign exchange market might continue to mount and see further depreciation in value of the naira this year.
This is the consensus of research economists in Nigeria banks. A survey conducted on the issue revealed that certain key variables will be responsible for the decline.
According to a research economist with United Bank for Africa, UBA, the decision to bring the public sector into the foreign exchange market might increase the pressure on the naira except the requirement of that sector is known and determined so as to increase the supply of foreign exchange proportionately.
According to them, the needs of this sector is not yet known. Their requirement might be enormous. The research economist argued that although some of the parastatals might have foreign exchange abroad they are known to ask for more as they are not able to generate enough of their own use.
Giving example, they said parastatals like NEPA, Nigeria Airways to mention a few, need a lot of foreign exchange for their operational needs. They do their aircraft servicing, purchase of spare parts and others with foreign exchange. By incorporating their needs into foreign exchange market, the pressure on the naira will certainly increase.

Research economists with First Bank of Nigeria Ltd and Nigeria Merchant Bank on their part argued that with the deflationary principle in he 1988 budget, more foreign exchange will be required to service the needs of the economy.
According to them, with more money in the economy, demand for goods and services will increase. As a result stock of finished inventory now in business warehouses will be used up.
This will also result an increased demand for raw materials s industries will increase their industrial capacity utilisation that would require more foreign exchange to maintain.
If this happens, industrialists will go to the foreign exchange market to obtain foreign exchange to replenish their stock. Some who may not be able to meet demand locally would want to import same. This will put further pressure on the foreign exchange and may result in the continued depreciation of naira.
According to a business analyst with the UAC of Nigeria and PZ Industries, given the fact that exports from Nigeria are limited and subject to the vagaries of world market fluctuation there is no possibility of increasing the supply of foreign exchange in the short run. The fact that most repatriate their export earnings further makes the situation not rosy for the future of FEM.
Research economists with the Central Bank viewed the situation differently. In their opinion, with the extension of the Dutch auction system to customer bids, caution will be exercised and very soon, a realistic value of the naira will emerge.
The Central Bank economists said that the incorporation of the public sector into the Foreign Exchange Market, FEM, is to treat all sectors equally most especially as government is giving more share of the economy to the private sector. It is in the spirit of deregulation of the economy that every sector be treated equally.
The Central Bank had in its December last year circular to authorise dealers informed them that with effect from the next foreign exchange bidding session, all ministries, government are to buy their foreign exchange requirement from FEM through bids with authorised dealers.
According to CBN, the official funding of FEM is to be increased by 51.35% in consideration of the direct participation of the public institution in the market.
What all agreed on is that the official funding of the foreign exchange market as it is now will not be enough to sustain a reflationary economy that is budgeted for the 1988 financial year.

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