The prolonged election-related uncertainty is expected to cut inflow of foreign exchange or at most, delay such inflows, Managing Director, Head -Africa Macro Global Research at Standard Chartered Bank, Razia Khan, has said.
She explained in a report that many offshore investors, still attracted to Nigerian yields, have been waiting for the uncertainty of the election period to pass before recommitting themselves to Nigerian markets.
Nigeria’s presidential and parliamentary elections, originally scheduled for February 14, were at the weekend, postponed to March 28. Gubernatorial elections will be delayed to April 11. This comes after security agencies informed the Independent National Electoral Commission (INEC) that they would be unable to provide adequate security for elections on February 14.
Khan said the Central Bank of Nigeria (CBN) has adopted a pragmatic approach to exchange rate and reserve management during the period of weaker oil prices.
“The CBN tightened policy in November while simultaneously devaluing the official retail Dutch Auction System (RDAS) rate to more realistic levels (at the time). Access to foreign exchange through the RDAS window was also limited in order to safeguard foreign exchange reserves. Perhaps recognising that investor inflows ahead of an election were unlikely, the CBN did not tighten policy further at its January 2015 policy meeting,” she said.
Khan said with investor inflows delayed, it is expected that the foreign exchange reserves would come under further pressure.
She predicted that further CBN tightening in March looks increasingly doubtful. Slowing growth may also have been factors behind that decision. “The election delay puts at risk our call for further policy tightening at the March Monetary Policy Committee (MPC) meeting. With oil prices still languishing at low levels, resulting in minimal injections into the foreign exchange reserves, we expect the reserves to come under further pressure, perhaps dropping to about six months of import cover,” she said.
The analyst said that a further tightening of administrative controls is plausible, with fewer categories of demand eligible for RDAS auctions.
“We expect spreads between Nigeria’s parallel and interbank foreign exchange rates to remain pressured, although an agreement by Nigeria’s Financial Markets Dealers’ Association limiting daily NGN depreciation in the interbank market to two per cent will likely slow the pace of weakening,” she said.
She predicted that the postponement of election will also potentially delay the formulation of policy aimed at helping Nigeria cope with lower oil prices. “The 2015 federal government budget currently assumes a benchmark oil price of 6$5/barrel (bbl). Efforts to accelerate non-oil revenue collection, especially measures that do not require legislative approval, are likely to continue in the near term. These include new levies on luxury imports, a review of tax exemptions granted to some investors, accelerated tax audits, and a potential doubling of the Value Added Tax (VAT) rate to 10 per cent. We see little reason why the VAT rate increase would have to wait until after the election, although there is likely to be some uncertainty around the timing,” she said.
She added: “We do not share the view of many market participants that the authorities will wait until after the election to announce a large official devaluation of the naira.”
-source: thenationonlineng.net
