IN the face of dwindling oil prices, the naira exchange rate should be adjusted to reflect the prevailing economic reality.
By so doing, the Central Bank of Nigeria, CBN, will bridge the gap between exchange rate in the official and parallel (black) markets, an economists has said.
Managing Director, Financial Derivatives Company Limited, Mr Bismarck Rewane, urged the CBN to act now to avert a worse economic failure.
Crude oil prices closed higher last week after bouncing back from six and half-year lows. Specifically, oil is trading at less than $50 per barrel, half the price of a year ago.
Rewane said the CBN needs to adjust the local currency in view of developments in the global market, saying “if you don’t do the right thing at the right time, you may do more later. Sooner or later, the currency will adjust because you cannot create a synthetic situation. And your signals must be consistent and logical. If you know that you have enough money to support the currency, then why are you locking the door? So, there are some inconsistency in signal and the price,” he added.
According to him, the challenges facing the Nigerian economy are more of external. “If you are a Nigerian government official and you came to power with the belief that if you fix the refineries and others, things would be fine. But the problem has gone beyond that. External imbalances are different from internal imbalances. Once you are integrated with the rest of the world, what happens over there affects you and you cannot run contrary and it is a question of time before you fall in line,” he argued.
The economist noted that crude oil price is determined by the market and geo-political considerations, adding that once the oil price comes down, the four countries that were mostly hit were Russia, Venezuela, Iran and Nigeria.
“So, we are looking for an optimal solution. If you asked me a year and half ago, what is the floor price of crude oil, I could bet with you that it will not go below $95 per barrel and then the price was $110 per barrel. And I was considered to be one of the realistic or pessimistic observers. If you asked me six months ago, I would have said $65 per barrel. But if you ask me today, I will quickly grab $45 per barrel,” he said.
Despite the oil price volatility, Saudi Arabia, the world’s largest oil exporting country, has maintained its production levels despite a collapse in the price of oil. It may issue bonds, or Islamic bonds known as sukuk to finance some spending. The kingdom has more than $600 billion in reserves it can draw upon should expenditure outstrip income from oil exports.
The country has built reserves, cut public debt to near-zero levels and is now working on cutting unnecessary expenses, while focusing on main development projects and on building human resources.
He said the total revenue shared by all governments in August through the Federation Accounts Allocation Committee, FAAC, declined to N511.8 billion. This was based on average oil price in June of $63.75pb and is expected to fall to N320 billion this month.
He said the dollar appreciation may push oil prices down, adding that August FAAC was down slightly by 1.3 percent when compared to N518.5 billion in July.
He said although states have started receiving the CBN’s intervention fund worth N338 billion, debt repayment will become difficult with the slide in oil prices, adding that some states have already restructured previous debt obligations.
Rewane’s position which was contained in the FDC’s September Economic Report, said interest rates at the interbank oscillates between 10 and 80 percent per annum, and that the local currency is now at N220 at the parallel market and still dropping.
“The naira has been held artificially stable by administrative measures,” he said, pointing out that the currency is supported by reduced leakages from oil and revenue management, while capital inflows have shrunk to as low as $2.6 billion per quarter. Inflation has spiked seven out of nine months in 2015.’’
The economist said administrative measures are temporary, unsustainable and cannot guarantee long term conservation of, or accretion in reserves.

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