The effort by the Central Bank of Nigeria (CBN) to prop up the naira months before the 2015 elections is being threatened by the slide in crude oil prices.
The naira has come under intense pressure and has tumbled to within 0.3 percent of a record low as Brent crude fell to the lowest level in more than four years.
While some of the world’s biggest banks say the collapse in oil is just about over, further losses will force the Nigerian central bank to choose between raising interest rates, eroding foreign exchange reserves or, eventually, devaluing the currency, according to Exotix, a London-based investment bank.
The CBN Governor, Mr. Godwin Emefiele, had said that the central bank would unveil plans to support price stability in the coming weeks.
“We’re getting close to the point where the alarm bells are ringing loudly,” the Head of Economics Research at Ecobank Transnational Incorporated in London, Angus Downie said, last week.
He added: “If oil prices continue to slide before the election, foreign-exchange reserves will come under pressure, and that’s when the authorities would be expected to adapt fiscal and monetary policies to the new oil-price regime.”
A weaker currency would boost the cost of importing everything from fuel to food, threatening support for President Goodluck Jonathan, who’s already under pressure for failing to stem attacks by Islamist militants.
Nigeria joins Russia, Colombia and Venezuela as the biggest losers from oil’s decline, according to the Chief Emerging Markets Economist at Capital Economics in London, Neil Shearing
Nigeria is Africa’s biggest producer of crude, which accounts for about 75 percent of government revenue. The country also imports about 70 percent of its fuel needs because of inadequate refining capacity.
The CBN has supported the naira since mid-September by using its reserves to sell dollars outside of twice-weekly auctions, according to Standard Chartered Bank.
At those auctions, it offers the local currency at a price of N155/$1, plus or minus three per cent.
Attempts to speak to the spokesman of the CBN, Mr. Ibrahim Mu’azu were futile.
The naira is weaker than that in the open interbank market. It fell to N165.83/$1 on October 13, the lowest level since it reached a record N168.9/$1 on February 20.
Brent crude for December has fallen 26 per cent since reaching a peak in June. It dropped to $82.93 last week, the lowest since May 2010, but had risen again to settle at $86 last week.
Bank of America and BNP Paribas predict prices will hold above $80 a barrel.
The CBN would be monitoring oil prices closely in coming weeks, Ronak Gadhia of Exotix has said.
“The central bank is going to have to make a judgment on whether the price drop is temporary or if this is a more permanent issue that makes it respond with some policy measures,” Gadhia added.
“The ideal scenario would be to devalue the currency. But in an election year that might not be palatable.
“The first choice for the central bank would be to tighten further and use up some of the reserves to keep the currency level”, while devaluation would be “a last resort”, Gadhia said.
However, Emefiele has acknowledged that the drop in crude oil price has presented some form of vulnerabilities to Nigeria, but assured Nigerians that both the fiscal and monetary authorities were taking measures that would make sure that the country withstands any likely shock on the economy.
“A number of actions would be unveiled in the next few weeks that both the monetary and fiscal authorities would ensure that Nigeria continues to remain strong and healthy to support growth and development in Nigeria.
“Overall, price stability would remain the primary focus of monetary policy in the short and in the medium term. With regard to the exchange rate, the major objectives of the bank policy have been ensuring stability in the value of the naira,” the CBN governor explained