The Central Bank of Nigeria (CBN) may devalue the Naira if the pressure on the currency continues through the first half of 2015. Pressure on the currency has been sustained as falling oil prices and the general elections intensifies.

“As pressure continues to increase in the first half, we expect that the CBN may consider another devaluation within a range of N175-N180 per USD, as reserves and oil prices continue to fall,” Nigeria’s Guaranty Trust Bank (GTB) wrote in its report titled Macroeconomic and Banking Sector Themes For 2015.

Devaluation again?

The CBN last November devalued the naira from N150-N160 to the U.S. dollar to N160-N176 as it battled to preserve macroeconomic stability. It also increased its benchmark interest rate to a record high of 13 percent from 12 percent. But the conditions that brought about the devaluation still exist and may get worse in the coming months. Oil prices have fallen to less than $45 per barrel from over $100 in less than a year. Analysts have predicted a further slump as the oil glut which brought about the price crash has shown no sign of ending soon.

Currencies of several emerging economies were hit by the US Federal Reserve’s tapering policy, but currencies of oil-based economies such as the naira and the Russian rouble have been hard hit. “The commencement of normalisation of monetary policy by the U.S. Federal Reserve… has accentuated capital outflows,” CBN Governor, Godwin Emefiele said last November. As at January 5, the CBN pegged the country’s forex reserve at $34.49 billion, a $20 million gain over December, 2014’s $34.47 billion. The apex bank says rising internal demand for the dollar had been exerting more pressure on the foreign exchange market. This is expected to continue until after the general elections in February.

Interest Rates

When Emefiele became the governor of the CBN last year, he had promised to gradually reduce interest rates. “We shall pursue a gradual reduction in interest rates,” he had said in his presentation. However, the forces, that forced the devaluation of the Naira also necessitated a hike in interest rate. The CBN thus raised its benchmark interest rate by 100 basis points to 13 percent. GTBank however expects it to further increase it by 50 – 100 basis points. According to the bank, a combination of reduced liquidity in banks, rising costs of funding, continued pressure on the Naira and rising yields in fixed income investments will compel banks to hike lending rates. Lending rates, it predicts, may end up rising by as high as  100 – 200 basis points.

Inflation

Inflation was 8.3 percent last September, but despite the devaluation of the Naira in November, last year ended with inflation actually reversing to 8 percent. The rate averaged 12.29 percent from 1996 until 2014, reaching an all time high of 47.56 percent in January of 1996 and a record low of -2.49 percent in January of 2000, according to Trading Economics. GTBank, Nigeria’s third largest bank, however expects inflation to pick-up to low double digits by the middle of the year.

Policy

The GTBank wants the CBN to show a more proactive stance this year. Policies fostering currency stability, economic improvement and the continued development of growth sectors are expected of the apex bank, as there is a limit to what can be achieved solely through monetary policy.

Emefiele released a Vision Paper when he became the governor of the CBN. The paper seem to showcase a clear plan on managing the economy, but with the mini economic crisis, largely due to falling oil prices, criticism of his policies and actions has grown.

With the Naira weakening against the dollar (N208 to the dollar on Friday), the CBN will continue monitoring the conditions surrounding the stability of the currency closely and may not hesitate to devaluate again if need be.