Nigeria’s Naira faces Downside Risk

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    Nigeria’s lucrative carry trade is losing its charm and is putting the naira at risk of devaluation in 2020.

    The country’s central bank offered rates that were once as high as 18% on bills known as open-market operations, or OMOs, sold to boost reserves and protect the naira. About 17 trillion naira ($47 billion) of these securities are now outstanding with around a third held by foreigners.

    A chunk of OMO notes mature early next year and it’s uncertain whether foreign holders will renew. Yields on the securities are now lower at an average of 13%, and liquidity is limited after the central bank barred local pension funds from investing.

    Dollar outflows from the country are higher than inflows and external reserves are down almost 10% since June. Oil revenues could support the naira if crude prices remain stable. Renaissance Capital estimates the currency is 28% overvalued, though. The downside risk is high.

     

    According to reports from Moody’s Investors, Nigeria will probably maintain its system of multiple exchange rates, which the International Monetary Fund has long-urged it to scrap, until at least early 2020, according to Moody’s Investors Service.

    Merging the naira’s various rates any sooner might force the government to weaken the currency and raise fuel prices, which would accelerate inflation, the ratings company said.
    Nigerian monetary and fiscal authorities are likely to wait until investments in oil refineries and fertilizer plants, including by billionaire Aliko Dangote, reduce Nigeria’s imports of petroleum products.

    While that may take another two years, it would put the government in a better position to stabilize fuel prices, which it caps at a level based on the central bank’s official naira rate, Moody’s said.

    If the government merges the exchange rates, “they won’t be able to provide discounted dollars to oil marketers.” Aurelien Mali, a sovereign analyst with Moody’s, said in an interview in Lagos on Wednesday. “It means that either they have to increase pump prices or give subsidies to marketers, which would impact public finances. Neither option is credible at the moment.”

     

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    Samson Gbenga Salau [Editorial Board Adviser] Gbenga Samuel Salau is a professional journalist with over 17 years experience in journalism, he is a graduate of Communication and Language Arts, University of Ibadan. On completion of his youth service, he joined The Guardian as a freelance journalist and was later absorbed as a staff. While in the University, he was a campus journalist reporting for the Independence Hall and Faculty of Arts Press Clubs. As a campus journalist, he won the following awards; Independence Hall Press Best News writer; University of Ibadan Union of Campus Journalists’ Best News Reporter/Writer; First Runner-up, Reuben Abati Award for Investigative Journalism; Association of Faculty of Arts Students’ Press Best Reporter; University of Ibadan Union of Campus Journalists’ Best Political Writer; Winner, Reuben Abati Award for Investigative Journalism, and University of Ibadan Union of Campus Journalists’ Best Interviewer. He served the Association of Communication and Language Arts Students, as the Public Relation Officer, the same year he was appointed the News Editor of the Association of Faculty of Arts Students Press. The following session, he was made the General Editor, and a member of the 13-man University of Ibadan Students’ Union Transition Committee. As a reporter in The Guardian, in 2014, he won the Promasidor Quill Award Best Report on Nutrition and DAME Business Reporting category. In the 2015 edition of the Promasidor Quill Award, he won the best Report on Nutrition and Brand Advocate Categories, while in 2016, he won the NMMA Print Journalist of the Year, first runner-up Golden Pen Reporter of the Year and SERAs CSR Awards. Gbenga Salau loves traveling, reading, and listening to songs with good lyrics no matter the genre.

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