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Operators Predict Naira Depreciation By Year End

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Financial analysts at Dunn Loren Merrifield (DLM) has said that the demand pressure in the foreign exchange market will occasion depreciation of the naira.

Speaking at a roundtable to review the performance of the economy in the first quarter of the year, they noted that efforts of the Central Bank of Nigeria to firm up the naira has caused the external reserves to decline by 22.2 percent from $48.6 billion at the end of the first quarter of 2013 to $37.8 billion at the end of the first quarter of 2014.

Mr. Tola Odukoya, Managing Director, Dunn Loren Merrifield Asset Management and Research Company, who led other DLM research analysts – Moses Ojo, Jide Nwaogwugwu, and Abdul Garba, at the roundtable, said that even the Acting CBN Governor, Dr Sarah Alade, alluded to this in the minutes of the last MPC meeting. He said Alade noted that continuing efforts to defend the naira is not sustainable, asking that the currency be allowed to find its level. It was however agreed at the roundtable that depreciation may not be politically expedient before the 2015 general elections.

The analysts said among other things in the first quarter: “Further decline in external reserves to $37.8 billion at the end of March 2014 from $43.6 billion in December 2013; increased funding of the foreign exchange market by the CBN to stabilize the naira also depleted reserves; while the Excess Crude Account (ECA) rose by $1billion during the quarter to close in March at $3.5 billion. We express our concern on the decline in external reserves as we re-iterate the need to rebuild the nation’s fiscal buffers. The weakening of fiscal buffers increased the economy’s reliance on portfolio flows which is a key driver of risk of exchange rate stability.”

They further noted: “Recent pressure on exchange rate further strengthens our position of a possible depreciation of the naira in the current year given that the nation’s foreign reserves will be further depleted if current exchange rate stability strategies are maintained. Our view is firmly supported by the commitment of the MPC to aggressively pursue the price stability and exchange rate objective. The erosion of the fiscal buffers through the depletion of the external reserves raises significant concerns as the economy is further exposed to vulnerabilities.

“For producers with exposure to imported raw materials, the risk of naira depreciation, although not a certainty but likely, and raw material price volatility in the commodities markets may expand production costs.”

Source: Vanguard

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