Naira Settles at N292.15/$ as Dealers Limit Spread on Offers

  •  Inflation rises to 11-year high of 16.5%

Obinna Chima in Lagos and James Emejo in Abuja

The naira closed at N292.15 to a dollar on the interbank market monday, slightly stronger than the N292.25 to a dollar at which it closed on Friday, after volatility surged following the decision by the Central Bank of Nigeria (CBN) to remove the limit on bid-offer spreads on the FX market, fuelling expectations that the naira would extend its fall as it was traded more freely.
It was gathered that the nation’s currency fell to as low as N297 to a dollar during intra-day trading, before it recovered to N294.5 to a dollar and finally settled at its closing rate of N292.15 to a dollar.

THISDAY learnt that the naira was buoyed by the decision by authorised dealers to restore the 50 kobo offer spread on the currency in the FX market.

The treasurer of one of the leading commercial banks, who pleaded not to be named, said the Financial Market Dealers Association (FMDA) sent an e-mail to its members, directing them to restore the 50 kobo spread on offers.

“What that means is that you can buy at any price, but when you are selling to your client, the spread should not be more than 50 kobo,” the source explained in a phone interview.

Shedding more light on what might have necessitated the decision, she attributed it to the anticipated funding of the one-month forward contracts of $697 million that matures this Friday, adding that “it could be to ensure that the naira does not fall below N300 to a dollar”.

However, the three-month non-deliverable forward contracts jumped 4.1 per cent to a record N329 a dollar, while contracts maturing in a year rose 3.3 per cent to N363, the highest level on a closing basis.

One-week historical volatility increased to 27 per cent, compared to an average of 8.6 per cent over the past year, according to the data compiled by Bloomberg.

The naira, however, did not budge on the parallel market as it closed at N365 to a dollar monday.

Following the pressure mounted by the financial markets and analysts on the CBN to allow the naira to be truly market-determined, in a bid to improve liquidity, the central bank finally removed the limit on bid-offer spreads in the FX market last Friday.

Responding to enquiries from THISDAY, a London-based Economist at Exotix Partners LLP, Alan Cameron, said the decision to allow market forces to determine the exchange rate was a big step for the country.

Cameron described it as an important sign of regulatory maturity on the part of the CBN.
“The effect may not be immediate, but we think this is a necessary step to restoring confidence in the FX regime, and attracting investment of all kinds back to Nigeria,” he added.

Also, research analyst at FXTM, Lukman Otunuga, said the elevated concerns over a potential technical recession in Nigeria might have forced the CBN to relinquish its stealth peg to truly allow the naira to be market-determined.

“Since June, there have been growing speculations over the CBN’s interventions, which simply repelled foreign investors, consequently pressuring the economy further. This development simply added to the repeatedly depressed oil prices and declining oil production from renewed militancy, which noticeably soured sentiment towards the Nigerian economy.

“Although there may be concerns of inflation spiralling out of control as the naira finds its true value in the short term, this could be the first true step for the nation to shield itself from external risks. With the parallel and official markets potentially closing the gap as the naira flee-floats, liquidity could increase as investors send their dollars to the market,” he added.
But as the naira firmed up at yesterday’s trade, the Consumer Price Index (CPI), which measures inflation, rose by 0.9 per cent to an 11-year high of 16.5 per cent in June compared to 15.6 per cent in May, according to the National Bureau of Statistics (NBS). This was the fifth consecutive month that the headline index rose.

The increase in the month under review was attributed to energy prices, imported items and related products, which continued to be persistent drivers of the core sub-index.

According to the CPI figures for June, which was released monday by the NBS, the highest price increases were noticed in the electricity, liquid fuel (kerosene), furniture and furnishings, passenger transport by road, and fuels and lubricants for personal transport equipment.

The NBS stated that while imported foods continued to increase at a faster pace, the food sub-index on the aggregate increased, albeit at a slower pace in June relative to May as the index increased by 15.3 per cent (year-on-year) in June up by 0.4 per cent from the rates recorded in May.

However, it stressed that the sub-food index was weighted upon by a slower increase in the vegetables and sugar, jam, honey, chocolate and confectionery groups.
“Month-on-month, the headline index has moved in a sideways fashion since February, the first month of a pronounced increase in rates this year.

“Specifically in June, the index increased by 1.7 per cent, lower by roughly 100 basis points from rates recorded in May,” the NBS stated.

It further explained that the corresponding 12-month year-on-year average percentage change for urban inflation increased from 11.2 per cent in May to 11.9 per cent in June, while the corresponding rural index also increased from 10.4 per cent in May to 10.9 per cent in June.

The NBS stated: “The core sub-index has increased at a faster pace for five consecutive months. Over the first six months of the year, the core sub-index increased by 12.8 per cent, up 5.2 percentage points from rates recorded in the corresponding period in 2015.

“On a month-on-month basis, after a brief uptick in May, the rate of increases in the core sub-index continued to slow in June.

“The index increased by 1.8 per cent, lower by 0.9 points from rates recorded in May. In June, on a month-on-month basis, the highest price increases were recorded for motor cars, electricity, solid fuels, fuels and lubricants for personal transport equipment groups, amongst others.

“The average twelve months annual rate rise of the index was recorded at 10.9 per cent for the period ending in June 2016, roughly 0.7 percentage points higher from the twelve-month rate of change recorded in May (10.2 per cent).”

NBS added that the average monthly price paid by Nigerian households for a litre of petrol across the country dropped to N149/litre in June compared to N150.28/litre in May.

According to figures provided by the bureau, Borno, Taraba and Adamawa States recorded the highest monthly averages of N173, N160 and N153 per litre, respectively, for the month while Zamfara, Pleateau and Oyo recorded the lowest averages of N144, N145 and N145 per litre, respectively.

On the other hand, the average monthly price for diesel rose to N183/litre in June compared to N148/litre in May, with Borno, Taraba and Kebbi States recording the highest monthly averages of N222, N200 and N200 per litre respectively.

Ogun, Imo and Lagos States paid the lowest monthly average prices of N173, N175 and N176 respectively.

Commenting on the latest inflation data, analysts at Lagos-based CSL Stockbrokers Limited, in a report yesterday suggested that inflationary pressure would remain till the end of the year.
Inputting the new numbers into its model, the firm disclosed that it had made a slight downward adjustment to its year-end forecasts, stating that it now sees inflation reaching 17.4 per cent in December, down from a previous forecast of 18 per cent.

“We stress however, that our inflation forecasts do not yet factor in the possibility that electricity tariffs increases might be reversed following a court ruling last week. We published a note showing that electricity tariff increases appear to have played a big part in the rise in inflation over recent months and any reversal might see inflation head lower, if and when tariff increases are excluded from the price basket calculations.

“If lower tariffs were incorporated into July’s inflation numbers for instance, we would expect inflation to fall below 14 per cent for the month.

“The National Energy Regulatory Commission is reportedly appealing the decision and we are therefore holding off from adjusting our inflation forecasts until there is more clarity on when and if the tariff increases are in fact overturned,” the report added.