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With the decision
of the Central Bank of Nigeria (CBN) to discontinue defending the
value, the naira may be facing imminent devaluation, some financial
analysts have said.

CBN governor,
Lamido Sanusi, told Reuters on Monday that the value of the naira need
not be maintained “at all costs”, though he predicted the currency
would remain stable. This comes after several months of meeting
increasing demands for foreign exchange, which has taken its toll on
the foreign reserves.

Nigeria’s foreign
reserves, which peaked at $62.24 billion in mid-May 2008, has
depreciated by over 43 percent since then, closing last week at $35.24
billion.

Mr. Sanusi further
said “exchange rates have multiple equilibria, and equilibrium exchange
rates will depend on what we see as the long-term sustainability of the
reserve positions.”

A financial
analyst, who spoke off record, said though the foreign reserves are
still at comfortable levels, the trend of withdrawals in the last few
months is a cause for worry.

“The last time the
naira was devalued was when many portfolio managers left Nigeria at the
thick of the global financial crisis. The situation has not changed
pretty much and even many diaspora Nigerians have reduced the amount of
money sent back home. The CBN is now the major source of foreign
exchange.”

He said the lack of
transparency on how the foreign reserves is calculated also puts doubt
on how well the economy is being managed.

“If the budget
benchmark is $45 dollars, and we have had higher prices in the last few
months, how come the excess crude account is not replenished? Crude oil
prices have increased, production has gone up, but reserves are
dropping,” he said.

Naira defence versus reserves

An indication of
the direction of the currency market emerged last week as the naira
sold for N150.01 at the official Wholesale Dutch Auction System (WDAS)
window, for the first time in several months. At the interbank market,
the naira sold for 152.25 to the dollar, with dollar demand
outstripping supply at the Central Bank’s bi-weekly forex auction.

Prior to now, the
naira had fluctuated between N148 and N149.50 at the official window, a
band that it had maintained since 2008. A total of $550 million was
offered at the WDAS last week, while $771.65 million was demanded. The
total sale stood at $707.65 million, representing 91.71 percent of what
was demanded.

Doyin Salami, a
member of the Monetary Policy Committee of the CBN, said at the August
Breakfast meeting of Nigeria South Africa Chamber of Commerce, that the
government has to make a choice whether to defend the value of the
naira, in which case, it could commit huge sums from the reserves to
meet demand; or could decide to devalue the naira in order to reduce
pressure on funds.

“Should I defend
the naira or should I defend the foreign reserves? That is the question
for the Central Bank to answer. Whatever happens is going to have
effect on inflation,” Mr. Salami said.

The last time the
currency was devalued was in December 2008, when the rippling effect of
the global financial crisis took its toll on the naira, which had
remained stable for nearly three years before then.