Nigeria is at the risk of experience a major financial woes that may cause the devaluation of naira and massive budget deficit as oil price continues its downward spiral.
Nigeria, the Africa’s top producer, relies on oil for only 14 percent of its gross domestic product (GDP) but crude makes up 95 percent of foreign exchange and about 80 percent of government revenues, both of which have shrunk rapidly as Brent crude lost more than a quarter of its value since June.
Foreign portfolio investors fearing heavy losses on the currency have pulled out — the main share index hit a 16-month low and the yield on government bonds rose 10 basis points on Wednesday.
The naira has lost around 4 percent this year, prompting the central bank to hold frequent additional dollar sales and lower the limit on banks’ foreign currency borrowing in efforts to prop it up.
At around 167 to the dollar, it is well outside the central bank’s target band of 3 percent plus or minus 155 to the dollar. The last time it was in the target range was in late January.
Foreign reserves fell rapidly from a peak of $48.9 billion in May 2013 to just $36 billion in June. They have since rebounded slightly and are currently around $38.3 billion.
Despite these losses, analysts say that a devaluation before the elections, when President Goodluck Jonathan will seek a second term, would be so unpopular that it’s unlikely unless oil prices, now at $82 a barrel, tumble further and force the bank’s hand.
“It will take some time of relatively low prices … before you see foreign reserves really being gobbled up,” Matthew Searle, senior African analyst at Business Monitor International, said.
“If oil prices fall further to the $60s or $70s a barrel, then the central bank will become the main source of dollars,” and will have to decide for how long it can keep up the fight.
At what point it throws in the towel is hard to tell.
Alan Cameron, London-based economist at Nigeria’s First City Monument Bank, thinks reserves would likely have to slide to close to $30 billion before a “last resort” devaluation would be considered.
The last time the bank lowered its target range for the currency was in late 2011 after the naira came under speculative attack and tight monetary policy failed to defend it.
In addition to a weak currency, Nigeria faces an increasing squeeze on its government finances.
Finance Minister Ngozi Okonko-Iweala told journalists last week that “Nigeria is not broke”, and analysts agree the country is a long way from struggling to meet its commitments.
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