Naira the currency of Nigeria that has been known for a while for its stability has experienced a level of weakest that injected a little panic at Forex market and Central Bank of Nigeria. The quick depreciation of naira must be a headache to the Nigerian financial policy makers at Central Bank of Nigeria (CBN) that wasted no time in reassuring the market that Nigeria has an adequate war chest to defend naira from aggressive speculators.
At the last session of Forex market naira was traded at around 164.50 and lately at 161.85 against US dollar. For the record naira has maintained stability at a level hovering around 155-160 against US dollar. Therefore the concern is real and currency warriors at Central Bank of Nigeria are already to fight back and defend naira.
Charlie Robertson, a London based expert and analyst at Renaissance Capital wrote that “Much of the existing investor base – both Nigerian and foreign, and the main companies we saw at our Africa conference in Lagos this week–are concerned about currency weakness–with many expecting a 5-10% depreciation this year, to roughly 167-175/$.”
Yes, Charlie Robertson is probably right, but the anticipating 5-10 percent depreciation may be too much. Somewhere at about 2-3 percent depreciation is reasonable but that is not going to occur and happen because Central Bank of Nigeria will not give into it nor is Nigeria willing to allow naira to slip into such a weakened currency.
One thing going for Central Bank of Nigeria is the moderately accumulated foreign reserve which stood at $42 billion. The deputy governor of central Bank of Nigeria Sarah Alade was emboldened in reminding the speculators and currency traders that Nigeria has the means and courage to intervene on behalf of naira.
Such a statement coming from deputy governor of central Bank of Nigeria Sarah Alade may psychologically impact the market positively and scare away speculators that will realize that Nigeria is ready to intervene if the need be so.
Naira may be attracting currency speculators for many reasons including for good and bad reasons. On a lighter side Nigeria’s naira has the world looking at it more positively because Nigeria has been recognized as a strong emerging market. In addition, the country’s financial house and fundamentals are relatively stable including its macroeconomics. The downside maybe that currency speculators probably feel some signs of weakness and they move in. But Nigeria with $42 billion in foreign reserve can adequately fend them off and defend naira.
The last thing Nigeria would do at the moment is to devalue naira because Central Bank of Nigeria may hold the view that it is too expensive to defend naira. But devaluation of naira will send a wrong message to our trading partners and may even trigger a currency war. Judging from the reaction and reassuring statement coming from Central Bank of Nigeria that is far fetch.