Despite the dip in the Nigerian equities market, analysts are
optimistic that measures put in place by the Central Bank of Nigeria to
mitigate the situation would yield results. This is just as the apex
bank has assured that though there was a decline in the nation’s foreign
reserves, there was still enough to support imports for at least six
months. In this piece. BUKOLA IDOWU reviews various monetary policy
measures the CBN has put in place to manage the dwindling fortunes of
the naira against other currencies.
Last week, the value of the naira reached a first time peak of N202 to the dollar at the interbank market in recent times and also sold at N215 at the parallel market, while the official rate remained at N168 as pressures mainly from withdrawing investors and Nigeria’s import demands intensified.
The value of the naira has been under intense pressure since the beginning of the fall of oil prices, which is the country’s major source of foreign exchange. This has led to a further tightening of monetary measures, a devaluation of the currency as well as other measures undertaken by both the monetary and fiscal authorities.
Despite the pressures and speculations in the foreign exchange market, the governor of the Central Bank of Nigeria (CBN) Mr Godwin Emefiele has maintained that there is no cause to worry or panic. He has also continues to assure of Nigeria’s ability to defend the currency in spite of a dwindling external reserves.
The foreign reserve which was at $43.5 billion at the beginning of last year is currently down by over 23 per cent or $10.2 billion to $33.3 billion. This according to the CBN governor is still enough to defend the naira as it can still cover six months of imports.
In the heat of the declining oil price, Emefiele had mentioned that the CBN will come up with measures to protect the economy and the Naira from declining crude oil prices. Consequently, it moved to protect banks from possible naira depreciation, by imposing restrictions on the amount of foreign loans they can borrow.
The CBN limited foreign currency borrowing of banks to 75 percent of the shareholders’ funds. Thereafter, the CBN banned banks from selling intervention foreign exchange in the interbank or to Bureaux De Change (BDC).
Also, it reviewed downwards the net open position of banks from one per cent to zero before bringing it back to present 0.5 per cent level so as to check banks from round tripping. Speaking at a meeting with stakeholders in Lagos recently, Emefiele warned that “the CBN will not hesitate to suspend the dealership of any bank that is found to be speculating or making false demands or documentations from the forex market.”
Also, to reduce the rate at which the external reserve was expended, the CBN excluded the importation of electronics, finished products, information technology, generators, telecommunication equipment and invisible transactions, from its foreign exchange sales, sending them off to the interbank market.
A circular issued by the CBN director of Trade and Exchange Department, Mr O.I Gbadamosi, stated that “in order to maintain the existing stability in the foreign exchange market and to further strengthen the various policy measures already initiated by the Central Bank of Nigeria, the importation of the following items shall henceforth be funded from the interbank foreign exchange market only: electronics, finished products, information technology, generators, telecommunication equipment and invisible transactions.”
With this, the CBN has transferred a huge portion of the demand for foreign exchange from the official market to the interbank, with the consequence of further depreciation of the naira in the interbank market.
While the apex bank had stopped banks from selling foreign exchange to bureaux de change, it also increased its weekly foreign exchange sales to them from $15,000 to $30,000 to ensure liquidity at the forex market.
With the number of registered BDCs in the country now at 2,544, the apex bank will increase its sale of foreign exchange to the BDCs to $76.32 million dollars as against $38.16 million which it used to sell. More recently, it took off demand pressures at the parallel market selling an additional $30,000 at a special intervention forex sales.
According to the chief executive of Sabil BDC, Aminu Gwadabe, relying only on the weekly sales from the apex bank will not be enough to meet the market demand. Several operators at the parallel market have also called for the sustenance of the intervention for the BDCs just as the apex bank does for the banks so as to be able to meet the demand pressures.
To save the naira from an accelerated decline, currency dealers had met and agreed to halt trading if there are more than two per cent intra-day slide in the naira. This is because of the dealers’ fear that the naira will hit N200 to the dollar, creating extreme volatility and adding to deteriorating liquidity conditions if steps are not taken to curb the slide of the local currency.
However, the decline in external reserve and the depreciation of the naira was triggered by increased foreign exchange demand driven by apprehension among foreign investors over the impact of falling crude oil prices on the nation’s economy, especially the external reserve, the uncertainty surrounding the 2015 and the insurgency in the northeast and the possibility of massive depreciation of the naira.
The shift in election dates also heightened investors’ apprehension as the value of the naira took a dive last week after the Independent National Electoral Commission announced a postponement of the 2015 general elections by six weeks. As the value of the naira hit an all time low of N204, interbank lending rates soared to 100 per cent.
FBN Capital analysts say “whereas previously the typical offshore investor may well have seen the elections as a distraction within a set timetable, now a host of other questions, mostly with a negative subtext, have arisen. This additional complication has seen the naira exchange rate weaken to N200 per US dollar on the interbank market, which happens to be our year-end expectation.
“The postponement pushes back the 2015 budget process and the point at which a new administration could impress the market (and the electorate) with a programme of fiscal and structural reform. The danger is of a lost year.”
Analysts believe the exchange rate pressure has become too strong for the CBN and are envisaging a further devaluation of the naira at the next Monetary Policy Committee (MPC) meeting which will be held in March after the general elections.
According to analysts at FBN Capital, the gap between foreign demand and supply is too large for the CBN to maintain exchange-rate stability.
Likewise, managing director and chief executive of Financial Derivatives Company Limited, Bismarck Rewane stated that “any further delay in making a devaluation decision is likely to be politically inexpedient and very expensive. Therefore, it is our view that another devaluation is now imminent and inevitable.”
At its last meeting, the MPC had left the benchmark interest rate, the Monetary Policy Rate (MPR), at 13 per cent, private Cash Reserve Ratio (CRR) at 20 per cent, public CRR at 75 per cent and liquidity ratio at 30 per cent.
Last week, the value of the naira reached a first time peak of N202 to the dollar at the interbank market in recent times and also sold at N215 at the parallel market, while the official rate remained at N168 as pressures mainly from withdrawing investors and Nigeria’s import demands intensified.
The value of the naira has been under intense pressure since the beginning of the fall of oil prices, which is the country’s major source of foreign exchange. This has led to a further tightening of monetary measures, a devaluation of the currency as well as other measures undertaken by both the monetary and fiscal authorities.
Despite the pressures and speculations in the foreign exchange market, the governor of the Central Bank of Nigeria (CBN) Mr Godwin Emefiele has maintained that there is no cause to worry or panic. He has also continues to assure of Nigeria’s ability to defend the currency in spite of a dwindling external reserves.
The foreign reserve which was at $43.5 billion at the beginning of last year is currently down by over 23 per cent or $10.2 billion to $33.3 billion. This according to the CBN governor is still enough to defend the naira as it can still cover six months of imports.
In the heat of the declining oil price, Emefiele had mentioned that the CBN will come up with measures to protect the economy and the Naira from declining crude oil prices. Consequently, it moved to protect banks from possible naira depreciation, by imposing restrictions on the amount of foreign loans they can borrow.
The CBN limited foreign currency borrowing of banks to 75 percent of the shareholders’ funds. Thereafter, the CBN banned banks from selling intervention foreign exchange in the interbank or to Bureaux De Change (BDC).
Also, it reviewed downwards the net open position of banks from one per cent to zero before bringing it back to present 0.5 per cent level so as to check banks from round tripping. Speaking at a meeting with stakeholders in Lagos recently, Emefiele warned that “the CBN will not hesitate to suspend the dealership of any bank that is found to be speculating or making false demands or documentations from the forex market.”
Also, to reduce the rate at which the external reserve was expended, the CBN excluded the importation of electronics, finished products, information technology, generators, telecommunication equipment and invisible transactions, from its foreign exchange sales, sending them off to the interbank market.
A circular issued by the CBN director of Trade and Exchange Department, Mr O.I Gbadamosi, stated that “in order to maintain the existing stability in the foreign exchange market and to further strengthen the various policy measures already initiated by the Central Bank of Nigeria, the importation of the following items shall henceforth be funded from the interbank foreign exchange market only: electronics, finished products, information technology, generators, telecommunication equipment and invisible transactions.”
With this, the CBN has transferred a huge portion of the demand for foreign exchange from the official market to the interbank, with the consequence of further depreciation of the naira in the interbank market.
While the apex bank had stopped banks from selling foreign exchange to bureaux de change, it also increased its weekly foreign exchange sales to them from $15,000 to $30,000 to ensure liquidity at the forex market.
With the number of registered BDCs in the country now at 2,544, the apex bank will increase its sale of foreign exchange to the BDCs to $76.32 million dollars as against $38.16 million which it used to sell. More recently, it took off demand pressures at the parallel market selling an additional $30,000 at a special intervention forex sales.
According to the chief executive of Sabil BDC, Aminu Gwadabe, relying only on the weekly sales from the apex bank will not be enough to meet the market demand. Several operators at the parallel market have also called for the sustenance of the intervention for the BDCs just as the apex bank does for the banks so as to be able to meet the demand pressures.
To save the naira from an accelerated decline, currency dealers had met and agreed to halt trading if there are more than two per cent intra-day slide in the naira. This is because of the dealers’ fear that the naira will hit N200 to the dollar, creating extreme volatility and adding to deteriorating liquidity conditions if steps are not taken to curb the slide of the local currency.
However, the decline in external reserve and the depreciation of the naira was triggered by increased foreign exchange demand driven by apprehension among foreign investors over the impact of falling crude oil prices on the nation’s economy, especially the external reserve, the uncertainty surrounding the 2015 and the insurgency in the northeast and the possibility of massive depreciation of the naira.
The shift in election dates also heightened investors’ apprehension as the value of the naira took a dive last week after the Independent National Electoral Commission announced a postponement of the 2015 general elections by six weeks. As the value of the naira hit an all time low of N204, interbank lending rates soared to 100 per cent.
FBN Capital analysts say “whereas previously the typical offshore investor may well have seen the elections as a distraction within a set timetable, now a host of other questions, mostly with a negative subtext, have arisen. This additional complication has seen the naira exchange rate weaken to N200 per US dollar on the interbank market, which happens to be our year-end expectation.
“The postponement pushes back the 2015 budget process and the point at which a new administration could impress the market (and the electorate) with a programme of fiscal and structural reform. The danger is of a lost year.”
Analysts believe the exchange rate pressure has become too strong for the CBN and are envisaging a further devaluation of the naira at the next Monetary Policy Committee (MPC) meeting which will be held in March after the general elections.
According to analysts at FBN Capital, the gap between foreign demand and supply is too large for the CBN to maintain exchange-rate stability.
Likewise, managing director and chief executive of Financial Derivatives Company Limited, Bismarck Rewane stated that “any further delay in making a devaluation decision is likely to be politically inexpedient and very expensive. Therefore, it is our view that another devaluation is now imminent and inevitable.”
At its last meeting, the MPC had left the benchmark interest rate, the Monetary Policy Rate (MPR), at 13 per cent, private Cash Reserve Ratio (CRR) at 20 per cent, public CRR at 75 per cent and liquidity ratio at 30 per cent.
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