Naira’s laborious climb

The naira climbed laboriously in the parallel market last week.   By the beginning of the week, the currency of Africa’s largest economy had appreciated almost by 15 per cent in one week.  It climbed to a record N425 to the dollar, up from the lowest rate of N520.
Then some irrational forces exerted negative pressure.  Banks were accused of discriminatory treatment of end-users who needed forex for payment of school fees and medical expenses.

They were accused of selling forex only to current account operators while ignoring demand from end-users with savings accounts.  That and some strange demands allegedly from some neighbouring West African countries exerted inordinate demand pressures that aborted the gains registered by the currency in the parallel market over a period of one week.  The naira closed the week at N465 to the dollar.
But the Central Bank of Nigeria (CBN) is determined to call the dealers bluff.  The apex bank is expected to pump an additional $350 million into the market this week to ease the merciless grip of the dealers on the forex market.

The CBN is fighting the tumbling value of the naira from the demand and supply ends.  It is beefing up supply and taking steps to choke up demands at the same time. While banks’ liquidity is tightening as the CBN debits their accounts for the naira value of the dollars they obtained, the apex bank mopped up more naira by issuing a N40 billion treasury bill that further reduced banks’ frivolous demand for dollars.
The naira may still be tottering in the forex market, but there are strong indications that the economy may be laboriously climbing out of recession.

The response to the $1 billion Eurobond floated by the federal government clearly signals resurging investor confidence in Nigeria’s economy.
The bond was heavily over-subscribed.  Investors are impressed by improvements in Nigeria’s oil production figures and the surging price of black gold.  For the first time in more than two years, Nigeria’s oil production hit a record 2.1 million barrels per day (mbd). That is a scant 100, 000mbd from the 2017 Appropriation Bill oil reference quota of 2.2mbd.

In 2016, oil production lumbered along at an average of 1.4mbd.  With average price of $40 per barrel, the economy slipped into recession in the first quarter of 2016.
The 2016 Appropriation Act had envisaged an oil output of 2.2mbd, but militancy in Niger Delta shut out 600, 000mbd.

Now it appears that Yemi Osinbajo’s recent economic diplomacy in the oil rich region may be calming frayed nerves, at least temporarily.  The vice president toured the region for two days and held talks with opinion leaders.  The federal government also promised development projects that would create jobs for the millions of unemployed youths in Niger Delta.

Nigeria runs a one-handed economy with the oil industry accounting for 90 per cent of the country’s foreign exchange and 70 per cent of government revenue. The industry’s tumbling fortune pushed the economy into recession. With moves to diversify the economy still on the drawing board, it is only the oil and gas industry that could pull the economy out of recession.

That is why everyone is applauding the increase in oil production and surging prices. With oil prices hovering around $56 per barrel and production sailing pretty close to the 2017 Appropriation Bill quota of 2.2mbd, the CBN is now empowered to pump more dollars into the market to reduce the yawning supply deficit which plunged the exchange rate of the naira to N520 to the dollar in the parallel market during the last week of February.

Besides, the Organisation of Petroleum Exporting Countries (OPEC) and other oil producers are now poised to fight the supply glut in the international oil market with production cuts that would boost prices.  Last month, oil producers’ compliance with the supply cut rose to 97 per cent.
At the moment, the only threat to compliance with the production cut is from America’s shale oil producers who have now been emboldened by resurging oil prices to return to business.  The shale oil producers might pump additional 400, 000 barrels daily into the oil market this month.

However, no one expects the return of the shale oil producers to drag oil prices below $50.
Saudi Arabia, OPEC’s largest producer, wants oil price at $60 per barrel and there are strong indications that the target might be met in 2017.  With the optimistic projections in the oil industry, the naira can only head out of its record humiliating depreciation.
The CBN has not set any target for its intervention in the foreign exchange market.

However, there are reasons for optimism that the naira might close the year at N300 to the dollar in the parallel market if current supply is sustained.  The federal government has worked out plans that might increase the capacity utilization of Nigeria’s struggling refineries. The measure would reduce dependence on refined petroleum imports.
If local refineries raise their capacity utilization to 90 per cent, the pressure on the naira might drop considerably.  Inflation rate is climbing down and even the economy’s negative growth rate is tapering out.  The end of recession is pretty close.

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