Iran deal dims prospects for naira

Prospects of the naira strengthening in the short term have been dimmed by Iran’s nuclear agreement with the United States and its negotiating powers, analysts have said. According to them, the deal has once again put oil prices under pressure thereby putting further strain on the Central Bank of Nigeria’s (CBN) ability to defend the naira.

With oil accounting for over 80 per cent of the country’s export earnings, experts note that the price of the commodity in the international market will prove critical in determining whether the apex bank would prevail in its current battle to stabilise the exchange rate.

After a brief recovery from the 50 per cent plunge late last year and early this year, oil prices have started to fall. Iran’s oil exports halved after the United States and the European Union (EU) imposed sanctions on the country in 2012 over its nuclear programme. Following the deal with the Western powers, the expectation is that the sanctions will be lifted and Iran would return to a global market that is already over-supplied. Indeed, a few hours after the deal was announced, Brent crude price fell to $1.15 to $56.70 a barrel, while US crude fell $1.05 to $51.15. Iran could increase its oil exports by up to 60 per cent within a year, according to a survey of 25 oil analysts questioned by the Reuters news agency.

Twelve of those polled believe Iran could raise oil output by up to 250,000 barrels per day in the first six months, while eight others predicted it could increase by as much as 500,000 barrels. Experts predict that even a modest initial increase in output will pull international oil prices down further as the market is already producing around 2.5 million barrels per day above demand. A Senior Financial Analyst at Fairbet Associates, Mr. Ben Omorogbe, said, “Although it was predicted by some analysts, the news of the Iran deal has come at bad time for the CBN.

This is because with low oil prices, the external reserves will continue to be under pressure and the CBN would not be able to use it to meet demand for foreign exchange.” It would be recalled that the CBN began its current battle to check foreign exchange arbitrage and speculation following the sharp drop in the price of oil in the second half of last year.

However, the series of forex measures introduced by the regulator have not stopped the naira’s drift on the parallel market. On Monday, the naira hit another record low of N241 to the dollar on the parallel market. It weakened by 1.0 per dollar as importers banned from accessing hard currency at the official interbank market by the CBN three weeks ago scrambled for hard currency in the unofficial market.

The CBN spokesman, Ibrahim Muazu, said last week that the regulator would not be focusing on the thinly-traded parallel market when determining the exchange rate, adding that people preferred to use the unofficial market for undocumented transactions. Muazu said the official interbank market had the capacity to handle legitimate dollar transactions but that people preferred to use the unofficial parallel market for undocumented transactions.