…Foreign reserves drop twice in 3 weeks
By ODUNEWU SEGUN
GOVERNOR of the Central Bank of Nigeria, Godwin Emefiele, has come under fire from both international and local investors over the dwindling fortunes of Nigeria which many attributed to the apex bank’smonetary policies under his watch.
According to a report by Bloomberg, the reserves have fallen by 20 percent since the end of June 2014, when Brent crude prices began a more than 60 per cent plunge, hammering the finances of Africa’s biggest oil producer and economy.
The foreign reserves which stood at $36.3 billion in October, 2014, fell to $32 billion in January, 2015, and stood at $28 billion by July before sliding again to $29 billion by September. The foreign reserves rose again to $30.11 billion by October, 2015 before dropping to $30.4 billion by the end of November. It has again dropped to $29.88 billion.
The naira, which has remained virtually fixed at 198 to 199 per dollar since the central bank imposed the foreign-exchange restrictions dropped by another 1.22 per cent against the dollar on the unofficial market last week with the naira going for N246. The measures have the backing of President Muhammadu Buhari and the newly-appointed Finance Minister KemiAdeosun.
Less than one week after the Central Bank of Nigeria, CBN, devalued the naira by 8.4 per cent in a bid to reduce the pressure on the falling national currency, the naira on Monday again fell by 3.4 per cent to a new low of N184.10 against the dollar, down from the N178 it fell to last week.
Some industry players predicted that the naira might fall further in the coming days if the CBN failed to cope with the expected demand.
While other African countries like Ghana and South Africa have raised interest rates to curb inflation threats which arises from weak currencies, Nigeria have moved in the opposite direction, imposing foreign-exchange controls to stabilize the naira, in contrast to other major oil-selling nations, including Russia, Colombia and Kazakhstan, that have let their currencies fall.
STAKEHOLDERS in the financial sector, particularly the foreign exchange, have critically examined CBN’s suspension of forex funding for 41 items, its impact on forex reserves and exchange rate stabilisation, as well as the overall implications for Nigeria’s trade policy and the economy.
The introduction of capital controls in the forex market that has negatively impacted on the financial sector and the larger economy. The effects of these policies are bound to affect the businesses and their ability to service their obligations.
There have been several reports about companies not having access to the forex market to purchase dollars which they need to service their dollar denominated loans. With the threat of more loans going bad due to these policies, the pressure on banks will continue to be a major concern as we approach the last few weeks of the year.
Even the decision of the CBN to ease the strain in the financial sector by reducing the benchmark interest by 2 per cent points to 11 per cent last week as well as lowering the cash reserve ratio to 20 per cent proved abortive.
The continued reduction in the country’s foreign reserve is also another fall-out from this controversial policy, and may likely put more pressure on Emefiele. Already, the country’s foreign reserve has dropped twice in the last three weeks.
Emerging market investors including Aberdeen Asset Management, AllianceBernstein and Invested Asset Management have sold Nigerian bonds and stocks this year to avoid what they see as an inevitable devaluation, which would cause losses on their holdings in foreign currency terms.
With importers blocked from accessing dollars, the liquidity boost may do little to increase output in manufacturing and other industries, while fueling inflation.
According John Ashbourne of Capital Economics in London, “Nigeria faces high inflation, pressure on its currency, and it desperately needs to attract foreign capital to fund the current account deficit created by low oil prices. It is, in short, in exactly the sort of situation in which economists would generally expect and recommend tighter monetary policy.”
The CBN’s Monetary Policy Committee had, on Tuesday, devalued the naira from N155 to N168 per dollar, following several weeks of continued fall that brought the naira to N177 per dollar last Monday.
“It’s hard to see this set of policies succeeding in the long run,” Charles Robertson, chief economist at Renaissance Capital Ltd., said by phone from London. “These are policy choices that have a finite lifespan. Unless Nigeria is saved by a much higher oil price, it is going to carry a lot of costs for the economy.”
Monetary policy easing signals the central bank has no intention of devaluing the naira yet, according to Razia Khan, head of Africa economic research at Standard Chartered Plc in London.
“The message that the Central Bank of Nigeria is undoubtedly sending to everyone with its policy easing is that it assumes a fixed-exchange regime remains in place,” she said by phone on Tuesday. “If it were thinking about a foreign-exchange market liberalization, which in all likelihood would lead to more foreign exchange weakness, it would have been more difficult to follow through with these stimulus measures in this format.”
Emefiele cited weak growth as a reason for reducing interest rates. The economy, the largest in Africa, expanded 2.8 percent in the third quarter from a year earlier, slightly higher than the 2.4 percent recorded in the previous month and less than half the 6.3 percent expansion in 2014.
“At the last meeting, we said that we had attained the end of tightening and that there was a need for the central bank of Nigeria to be seen to play its own role to put in place policies and regulations that will stimulate growth and development in the country,” Emefiele said.
Lower interest rates may add to pressure on inflation, which slowed for the first time in almost a year in October to 9.3 percent. The central bank’s goal is to keep inflation in a range of 6 percent to 9 percent.
“There is a trade off,” LanreBuluro, head of research at Primera Africa Securities Ltd., said by phone from Lagos. “In the short term, the central bank wants to trade off inflation and if the economy picks up it will tighten again.”
The CBN governor, while giving analysis of the state of the Nigerian economy, said it desperately needs to be revamped, adding that though the policy had already been introduced by the CBN, the apex bank is still open to dialogue. He likened the policy to the pains and pangs of childbirth.
“When you dialogue, you don’t have a fixed position; you have to listen to both sides. The Central Bank and government do recognise that the policy exclusion of 41 items from funding through Forex appears to be unpopular wi