Recently, the CBN published Monetary Credit, Foreign Trade and Exchange Guidelines for Fiscal Years 2020-2021. In the guideline, the apex bank expects the FX reserves to fall lower to between $29.9bn and $34.4bn if oil prices remain low. This further raises concern around the value of the naira. Recall that early 2019, the CBN governor highlighted that the trigger point for devaluation are oil prices falling below $45 – 50/ b and the FX gross reserves declining below $30bn.
In 2020, the COVID-19 pandemic hastened the actualization of the first condition and oil prices fell well below $40/ b. Expectedly, a price adjustment and a move towards convergence of the exchange rate windows followed suit. Despite the price adjustment, the pressure on the naira persisted. I n a bid to actively manage the foreign reserves (which currently stands at $35.7bn) amid limited inflows, the CBN halted sales of dollars to BDCs (until recently) and intervention in the I&E window.
Besides low crude oil prices, a backlog of FX demand, the expected huge sized OMO maturity and the ensuing foreign capital outflows given the low yield as well as risk-off sentiments of foreign investors, we expect external trade deficit to widen even further. Given all the above, we believe that further price adjustment to the naira might be in the horizon as the CBN continue to struggle to defend the local currency.
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