CBN sacrifices forex savings for naira stability

  • Blows $36.6bn in 2018

In 2018 alone, the Central Bank of Nigeria spent $36.6bn to maintain Naira’s stability as against the $15.8bn sold in 2017, translating to a whopping 130%, a CBN report has revealed.

According to the report, $25.6bn was for spot sales while $11bn was sold in forward transactions. Included in the spot sale was $8.2 billion sold in the I&E window.

From the report, the 2017 sales were $15.8 billion lower than spot sales recorded in 2018. The bank reported that spot sales for 2017 were just $3.4 billion compared to $25.6 billion in 2018 alone.

Defending the sales, the CBN explained that higher sales recorded in 2018 suggest there was more demand for forex in 2018 compared to 2017. Thus, to keep the exchange rate stable and speculators at bay, the CBN had to increase its defense of the naira by selling more dollars.

This is further buttressed by the more than 8 folds increase in spot sales with most of it targeted at the I&E window where foreign investors trade.

“The increased volume of transactions in 2018 was attributable largely to the Bank’s foreign exchange policy and its management, coupled with the improvement in the levels of foreign reserves during the year.”

By burning through reserves, the CBN sacrifices forex savings for naira stability hoping that this will help drive down the inflation rate. Critics believe this might be work in the short term but it is detrimental in the long run when we factor in the opportunity cost of burning out reserves.

According to analysts, the exchange rate is somewhat overvalued at N365. They point to frequent interventions in the FX market by the CBN as one of such artificial dynamics that inhibits price discovery. The more CBN intervenes to stifle demand the better the chances of the naira holding sway at its current price.