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Saving the Naira from COVID-19, Oil Price Slump

The uncertainty in the global economy has continued to increase due to the effects of the COVID-19 pandemic. The disease as well as the oil price war between Russia and Saudi Arabia, have damaged appetite for assets prices across the world, with investors adopting a wait-and-see approach.

In fact, the outbreak and spread of the disease has resulted to volatility in markets around the world as there is little clarity on what trajectory the virus will take and how effective government measures will be.

For crude oil, the slump in price was triggered by a price war between Saudi Arabia and Russia as well as very low demand for the commodity due to the virus. As of last Wednesday, the benchmark Brent crude price fell to an 18-year low of $22.85 per barrel after Saudi Arabia threatened to ramp up production to an all-time high of 12 million barrels per day in the coming months. It, however, traded around $29 per barrel on Friday.

In Nigeria, oil revenue remains the backbone of the economy and provides majority of the country’s revenue and forex inflow.

In fact, oil accounts for about 90 per cent of Nigeria’s export revenue and accounts for about 60 per cent of total federal government’s revenue. This explains why oil price movement is often the bellwether for the country’s economic health, and why there is a swift pass-through on exchange rate and inflation.

The foreign reserves have since depreciated to $35.9 billion as at last Thursday.

These unfortunate developments have forced the Central Bank of Nigeria (CBN) to adjust the naira/dollar exchange rate, effective Monday.

Going forward, the naira/dollar exchange rate on the Investors and Exporters’ (I&E) window is now pegged at $380 to a dollar and would be allowed to freely move around the targeted band, THISDAY gathered from a reliable CBN source.

The naira closed at N372 to a dollar on the I & E window on Friday. Activity level on forex window strengthened last week as total turnover surged 126.3 per cent to $3 billion from $1.3 billion recorded the previous week.

In addition, the source told THISDAY that from Monday, the exchange rate for the dollar on the Bureau De Change (BDC) window would also be adjusted to N380 to a dollar, as against N360 to a dollar it was last week. The N380 to a dollar would also apply to the small and medium scale enterprises (SMEs) as well as customers requesting the greenback for invisibles such as tuition fees, personal travel allowance and business travel allowance.

Furthermore, THISDAY learnt that the official exchange rate would from this week, be adjusted to N360 to a dollar, as against its current rate of N307 to a dollar.

“You may choose to call it technical devaluation if you like, but all I am saying is that there’s an adjustment in I & E window of the market to reflect developments foisted on the market by the COVID-19 crisis.

“So, what we have done is to allow the naira mirror developments in the market-determined I &E window,” the source explained.

A circular from the CBN confirmed the development. The circular addressed to all banks and BDCs titled,’Weekly Exchange Rate Disbursement of Proceeds of International Money Transfer Service Operators (IMTSOs)’, dated March 20, 2020, stated that from Monday, the applicable exchange rate for dollar sales from IMTSOs to banks would be N376 to a dollar.

Also, the circular that was signed by the Director, Trade and Exchange Department, CBN, Dr. O.S. Nnaji, further stated that the exchange rate for banks to the CBN would be N377 to a Dollar; CBN to BDCs would be N378 to a Dollar; BDCs to end-users would not be more than N380 to a Dollar.

“Volume of sale for each market is $20,000 per BDC. Kindly note that the GBP rate should be derived from the dollar cross rate on the date of sale,” it added.

The CBN had last year, said if crude price drops below $45 per barrel and at the same time the external reserves fell below $30 billion, the bank might be compelled to devalue the naira.

Trading data from Bloomberg terminal on Thursday, had shown that at the auction of the CBN open market operations (OMO) instruments, demand had dropped significantly, which was a reflection that Foreign Portfolio Investors (FPIs) have since adopted a wait-and-see approach to the raging COVID-19 pandemic.

The parallel market, rate closed on Friday N375 to a dollar. At the FMDQ Securities Exchange (SE) FX Futures Contract Market, the total value of open contracts settled at $13.6 billion, 5.3 per cent higher than the prior week.

The MAR 2021 instrument (contract price: N371.00) had the most buying interest in the week with an additional subscription of $92.7 million which took total value to $645.6 million.

Meanwhile, the MAR 2020 instrument (contract price: N367.22) was the least subscribed with an additional subscription of $15.5 million putting the total value to $1.3 billion.

To analysts at Afrinvest West Africa Limited, going forward, “We do not see a substantial turn around in the direction of oil prices until both parties signal an early return to the negotiation table.”

The Director General of the Lagos Chamber of Commerce and Industry (LCCI), Dr. Musa Yusuf, told THISDAY that current macroeconomics realities as well as developments in the global economy has made exchange rate adjustment inevitable.

Yusuf, however, also said he was not clear about what the position of the central bank on the issue of devaluation or exchange rate adjustment was.

“But the reality is that it is difficult, if not impossible, to subdue the market.

“My view is that current macroeconomic fundamentals cannot support the current exchange rate regime. This underscores the inevitability of an exchange rate adjustment.

“We actually do not have a choice in the circumstances. To do otherwise is to create new complications and precipitate a crisis for the economy. You cannot give what you don’t have. The facts are glaring and overwhelming,” he added

To the Global Chief Economist at Renaissance Capital, Charles Robertson, “Proof the virus is being brought under control is needed before investors can begin to focus on the economic fall-out from the lockdowns.

“A slowdown in Italy’s cases might help – but US markets are unlikely to stabilise when active cases are rising by nearly 40 per cent a day. We think we need to see at least half that figure.

“There is increased bearishness among many we speak to. We think it is time for the IMF and World Bank, G-7 and China, to offer significant support to emerging and frontier markets.”

Also, analysts at Moody’s Investor Services noted that the global spread of the coronavirus would slow economic growth significantly and inflict disproportionate damage on some highly-exposed economies.

“The rapid spread of the coronavirus in the last two weeks, widespread business closures and unprecedented restrictions on social interactions will result in a permanent hit to global economic activity this year.

“A sharp contraction of the global economy, at least in the second quarter, appears imminent.

“Given sharply lower global growth expectations and acute market volatility, we have taken some rating actions already in the most affected sectors and expect to take more in the coming weeks.

“These actions reflect the breadth and severity of the shock, and the broad deterioration in credit quality that it has triggered,” it added.

The unfortunate development in the global market has seen central banks and policy makers around the world continue to introduce stimulus package tackle the impact of the disease on economies.

In Nigeria, the CBN last week announced its decision to increase its intervention to boost local manufacturing and import substitution with the injection of an additional N1.1 trillion across all critical sectors of the economy.

The move, which was in line with the banking sector regulator’s efforts to cushion the impact of COVID-19 on the Nigerian economy, came two days after it had unveiled a six-point palliative to ameliorate the continued impact of the global pandemic on the country.

The CBN Governor, Mr. Godwin Emefiele, also announced a fresh N100 billion loan to support the health authorities to ensure laboratories, researchers and innovators work with global scientists to patent and or produce vaccines and test kits in Nigeria, to prepare for any major crises ahead.

Emefiele had also said an implementation committee to drive the private sector contribution of N1.5 trillion infrastructure funding that will link farming communities to markets as agreed at the recently concluded ‘Going for Growth,’ economic roundtable held in Abuja, last week, would be set up this week.