Bismarck Rewane, the chief executive officer of Financial Derivatives Company (FDC), says the naira may depreciate following the Central Bank of Nigeria’s (CBN) decision to cut its benchmark interest rate to 23 percent.
Rewane spoke on Wednesday during Channels Television’s
‘Business Morning’ programme.
He said the local currency may not weaken as much as feared,
citing the naira’s estimated fair value and Nigeria’s “still-positive” real
interest rate.
“The naira will depreciate, but not as much as fear, because
the naira fair value is about N1,150 to $1,” Rewane said.
The economist said the rate cut has reduced Nigeria’s real
rate of return from about 11.1 percent to 7.61 percent, but noted that the
differential remains attractive to foreign investors engaged in carry trades.
“I’d rather have 7.61 positive in Nigeria than have 0.55
negative in the European Union,” he said.
Rewane said the interest rate differential between Nigeria
and major economies remains a factor that could support foreign capital inflows
despite the rate reduction.
He said the lower rate could, however, affect foreign
portfolio investment (FPI), adding that diaspora remittances could increasingly
serve as a substitute.
“The diaspora flows will be a substitute for the foreign
portfolio investments,” he said.
Rewane said the rate cut could also weaken national savings
as returns on deposits decline.
“You either save or you consume, but the national savings is
very low. So when you do this, it falls further,” he said.
“The danger is that you may then begin to start to buy
alternative assets, which includes dollars, Bitcoin,” Rewane said.
According to the FDC chief, national savings stood at about
N97 trillion, compared with the national gross domestic product (GDP) of about
N442 trillion.
“You need this to be higher because, in the end, savings
will give you investment, and investment will give you productivity, and
productivity will give you inclusivity,” he said.
‘GOVERNMENT BORROWING COSTS TO DECLINE’
Rewane said the rate cut would also reduce the federal
government’s cost of domestic borrowing and could lower its debt-service
burden.
He said the government currently spends about N15.8 trillion
on debt service.
“Federal government cost of borrowing will fall sharply by
about 350 basis points,” he said.
Rewane, however, said lower interest rates must be supported
by fiscal consolidation and efforts to block leakages in government finances.
“The real issue is not coordination; it is to achieve fiscal
consolidation,” he said.
“You achieve price stability by blocking leakages, and so
the fiscal authorities have their job cut out for them.”
“Monetary policy cannot do it all alone. Monetary policy
goals are for price stability. Fiscal goals are for growth, and we have to look
at that,” he said.
Despite the rate cut, Rewane said inflationary pressures
could persist, projecting headline inflation at 16 percent in October.
“We think that inflation in October will go up to 16 percent
in Nigeria,” he said, citing petrol prices, money-supply growth, insecurity and
flooding among factors that could push inflation higher.
Rewane said petrol prices could reach N1,400 per litre,
while cooking-gas prices could rise to N21,250 in October.
The economist said cooking gas, which was sold for about
N16,000 in August and N20,000 in September, could rise to N21,250 in October.
He added that higher jet-fuel and transportation costs could
also feed into inflation.
The FDC chief said domestic output growth would remain
resilient, while exchange-rate stability could help inflation moderate over
time.
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