Nigerians crave stability in purchasing power as naira falls amid disinflation, oil rally

FOLLOW ING THE ADOPTION of the Nigerian Autonomous Foreign Exchange Fixing (NAFEX) rate by the Central Bank of Nigeria (CBN) in late May, which caused the naira to weaken against the dollar at the parallel FX market to a year-low of N505, reducing further the premium at that window, Nigerians may not be ready for another erosion of the purchasing power of the local currency.

At the investors’ and exporters’ (I&E) segment of the foreign exchange window, most market participants maintained bids of between N394 and N420.97 per dollar during the week amidst the continued freefall of the naira in the market. However, analysts knowledgeable on the matter have projected a convergence around the I&E foreign exchange market to continue, while the parallel market rate oscillates between N470 and N490 to the dollar at the start of the second half of 2021, as the central bank continues to adopt a crawling peg strategy through into the third quarter.

In recent times, the CBN has maintained focus on its primary mandate of price and exchange rate stability despite the expectations that the apex bank will step back on its forex rationing stance, boost dollar sales at the forex market and keep clearing its forex backlog to FPIs. With the gradual positive rally of the price of crude oil to about $74.25 recently, gross external reserves as of the middle of June declined to $33.85 billion which, according to the CBN, reflects sales to the foreign exchange market and third-party payments. However, it is expected that higher oil prices (above $70) will buoy the naira as well as the reserves northward.

After over 36 months of continued uprise in the headline inflation to a 4-year high of 18.17 percent in March 2021 and, however, dipping to 18.12 percent in April with a further plunge to 17.93 percent year on year in May 2021 with a 19 basis points downward movement, according to the inflation report by the National Bureau of Statistics, key risks to the expectations of economic analysts remain the possible upward review of electricity tariff and removal of fuel subsidy which would see fuel pump price rise.

Nevertheless, food prices remain elevated as preexisting supply chain disruptions persist, causing lingering food supply shortages across several regions in Nigeria. Thus, the recent moderation in food inflation is broadly driven by a high base for the food sub-index. As seen from the analysis of the data from NBS, the food index, which is a major driver of the headline index retreated 44 basis points to 22.28 percent in May from 22.72 percent in the previous month resulting from increases in prices of bread, cereals, milk, cheese, eggs, fish, soft drinks, coffee, tea and cocoa, fruits, meat, oils and fats and vegetables.

However, at the recent Nigerian Governors’ Forum, there was the approval of full deregulation of the downstream petroleum sector which projects a further increase in the retail price of PMS by 137.65 percent to N385 per litre.

Nigeria’s power sector continues to operate or perform below par despite the signed contracts by the federal government to raise power generation by 360 megawatts. Consequently, more findings have shown that 12 power plants sit idle for operation as power generation falls to 3928 megawatts.

This poses more strains for the pocket of the average Nigerian who sees the continued devaluation of the local currency as a risk. With growth expected to spike moderately to 4.5 per cent on base effects in the second quarter GDP numbers, the naira has before now been anticipated to crawl up to N412 and N415 to the dollar at the I&E window as the CBN increases its intervention in the foreign exchange market by $1 billion.