Following the Bankers’ Committee meeting that took place last week where it was reported that international School Fees payments and Health demands constitute the bulk of FX utilization demands of Deposit Money Banks (DMBs), speculations concerning the currency have grown considerably.
Consequently, sustained unmet demands and reports from the Committee meeting have caused the local currency to depreciate in leaps and bounds depreciating 13.8% WTD in the parallel market. After opening the week at N345.00/US$1.00 on Monday, parallel market rate closed at N400.00/US$1.00 this week. This was following the average depreciation rate of about N25.00/US$1.00, a far cry from the pre-Committee meeting weekly depreciation rate of N2.50/US$1.00. Consequently, the margin between the parallel market and official market rates - CBN at N197.00/US$1.00 and interbank N199.10/US$1.00 - have continued to widen sharply.
While the Apex bank and the Presidency remain resolute, maintaining that it will not have the Naira ‘killed’ despite calls for an official devaluation, the pressure on BDC and parallel market rates continue to mount as monetary authority's inaction worsens concern about the outlook of the Naira. Away from calls for naira devaluation, our view is that the uncertainty surrounding the outlook of the naira is more worrying as this amplifies speculative attacks and round tripping by speculators who bet on higher margin between the interbank market rate and the BDC/parallel rate.
Accordingly, the current stance of the monetary authority on the naira and the welfare consideration (further hardship on the poor if the naira is devalued) of the presidency appears counterproductive given the Apex bank’s inability to meet demand amid impaired dollar inflow and lower external reserve. This is given that despite government’s emphasis on inward looking strategies as a means to managing the level of import dependence, local appetite for imported goods remained largely unchanged. Thus, in a bid to meet demand, importers still have to source FX in the parallel market. However, market speculation, driven by CBN’s inactivity will continue to worsen parallel rate if uncertainties in the market persists. Thus, the feedback effect of this will be felt on aggregate welfare as domestic prices level rises.
Our view on the implication of the development in the currency market for capital flows (underscored by 53.8% Y-o-Y decline in capital inflows to US$9.6bn from $20.8bn in 2014.) seems over flogged, however we note the expanding significance of the parallel market segment of the currency market and the refusal of the Apex bank to stem market volatility will unintentionally continue to hurt domestic economic activity (in the absence of an appropriate structural reform to engender domestic productivity) and hence welfare of the poor. Therefore, we stress the need for the monetary authority to step in to stem the rent seeking activities going on in the parallel market.
Going forward, the challenge of greater import costs on businesses is expected to further impact both the core and food inflation rates as cost push factors weaken operating margins amid demand pressure in the FX market. However, earlier in the week, the National Bureau of Statistics (NBS) released the January 2016 CPI report which indicated that CPI stayed flat at 9.6% Y-o-Y but grew 0.9% M-o-M from 1.0% in December. The food sub-index increased at the same pace of 10.6% Y-o-Y in January while it advanced at a slower pace of 0.3% from December at 0.9% M-o-M. The core sub-index however grew to 8.8% Y-o-Y from 8.7% in December but stayed flat at 0.8% M-o-M.
Contrary to the above, we believe the implication of the development in the FX market points to further pressure on inflation rate in subsequent month as import costs continue to rise. In the interim, this is expected to continue to impair operating performance of companies, thus heightening recessionary tendency of the economy in the short to medium term.