The Nigerian Central Bank Governor Sanusi announced last week that the bank had decided to lift the lock-in period (effective 1 July 2011), which compelled investors to hold naira positions for a minimum of one year. Since the announcement, the Naira has strengthened by 4.2% by Friday.
Until now, investors, who wished to participate in government fixed income securities, were required to hold their positions for a minimum of one year, which made some investors nervous, and may have contributed to investors holding back from investing in that country, fearing being held up during the very uncertain global markets now persisting. The strengthening of the Naira seems to suggest that the lifting of the restriction has been well received by investors.
Furthermore, at the currency auctions, the Central Bank of Nigeria has only met USD dollar demand 9 times out of the 45 auctions held by the bank. This shortfall has let to consistent weakening of the currency, which had depreciated by over 3% since the beginning of the year. The last two auctions held by the CBN saw the bank meet the demand by over 150%, indicating that investors are not so nervous about holding Naira positions.
This development is positive for inflation outlook: Nigerian inflation, as in many countries in SSA, has been escalating, and has been particularly sensitive to the exchange rate. A weaker Naira (against the USD) has been consistent with higher inflation, a relationship that is very strong and thematic of countries like Nigeria, which are import dependent.
The central bank has committed to keeping the Naira/USD exchange rate at a level of 150 +/- 3%, but hasn’t always met the currency auction demand, leading to the currency weakening.
Inflation in Nigeria for May 2011 stood at 12.4% year-on-year, up from 11.3% in April. We expect inflation to stay in double digits for the next few months, but moderate in the last quarter of the year as the Naira gains some strength, and on the back of lower transport and energy costs. Also, monetary policy has been tightened since the beginning of the year, and this should help with inflation and inflation expectations.
Xhanti Payi
Assistant Economist
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