CBN new policy action is ‘first course in devaluation process’

Lukman Otunuga, a  research analyst at FXTM, says the new policy actions taken by the Central Bank of Nigeria (CBN), can be seen as the first course of an imminent devaluation process.

Commenting on the new policy action, Otunuga said the naira has been exposed to further losses as “investor’s re-evaluated the new Central Bank of Nigeria forex policy”.

He referred to the decision as logical, considering its potential to reduce pressure, and boost liquidity.

“With the dollar demand for school fee payments overseas and personal travel allowance enforcing downside pressures on the parallel market, the move by the CBN to sell Dollars to retail users via commercial lenders seems logical,” he said.

“While the policy may create some transparency, liquidity and efficiency in the Nigerian FX markets, this does not solve the overriding problem of multiple exchanges.

“Eventually, the CBN may be forced to bridge the disparity between the official and parallel markets which has added to Nigeria’s woes.

“With expectations heightened over the central bank devaluing the local currency in an effort to create liquidity and stability; this new policy could be viewed as the first course.”

Otunuga said the demand for the dollar, which is not printed in Nigeria, is inexhaustible, and this will keep the naira vulnerable.

“It must also  be kept in mind that the inexhaustible demand for the dollar, that is not the legal tender in Nigeria, continues to leave the naira vulnerable to heavy losses.

“Further declines should be expected in the near term as the combination of dollar strength, bearish economic fundamentals and speculations of a devaluation encourages sellers to drive prices lower.”