Falling reserves puts tight rein on Naira - THE SUN

DECEMBER 03, 2019

BY   Omodele Adigun

As Nigeria’s foreign reserves fell to $39.83 billion last month, from October’s figure of $40.55 billion, there is anxiety that it may trigger Naira depreciation if something urgent is not done.

Although, the custodian of the external reserves has given assurance that ‘no cause for alarm’ as “the naira-dollar exchange rate”, particularly, “at the I&E window has remained stable for the past 29 months at N360 – $1 and we have witnessed significant convergence in the exchange rate across the various market windows.”

But be that as it may, analyst has expressed concerns that further signs of the reserves declining is likely to weaken the Naira which could translate to rising inflationary pressures.”

Already, the nation’s annual inflation rate has galloped to 11.61 per cent in October,  from September‘s 11.24. That was after it plummeted from an all-time high of 18.7 per cent to 11.08 per cent last August. “The uptick in headline inflation is partly driven by cost–push factors such as the recent border protection measures of the Federal Government”, says Godwin Emefiele, the CBN governor.

He added: “However, core inflation as at October 2019 is now under nine per cent. We believe this (uptick in headline inflation) will be temporary as efforts are currently being made to induce greater production of staple food items.”

But that assurance may have failed to convince the likes of Lukman Otunuga, a London-based senior Research Analyst at FXTM, who sees the Naira struggle to maintain stability against the Dollar in coming days.

His words: “The Naira may struggle to maintain stability against the Dollar after Nigeria’s foreign exchange reserves decreased to $39.83 billion in November from $40.55 billion in October of 2019.Falling foreign reserves could complicate the Central Bank of Nigeria’s efforts in defending the Naira against domestic and external risks. Further signs of reserves declining is likely to trigger speculation around the Naira depreciating which could translate to rising inflationary pressures. Given how inflation( soars in the country),(it) is already at a 17-month high at 11.61 per cent. The CBN is seen standing pat on interest rates in the short to medium term.”

But brandishing his efforts in successfully defending the Naira so far,  Emefiele last Friday told gathering at the annual Bankers Dinner in Lagos that his tight monetary policy has continued  to channel foreign exchange inflows into the Nigerian market.

His words: “The impact of a tighter monetary policy regime, attractive yields in the money market, and our efforts at supporting domestic productivity in the agriculture and manufacturing sectors; along with improvements in oil production, have supported continued foreign exchange inflows into the Nigerian market.

In the I&E (Investors, Exporters and End-Users) window, over $60 billion worth of transactions have taken place since the inception of the window in April 2017, and our foreign exchange reserves are above $40billion as at October 2019, relative to its  low point of $23billion in October 2016. We have been able to build our reserves in the midst of lower oil prices, as strong reserves aid the confidence of domestic and external investors.

“Today, our current stock of external reserves is able to finance nine months of current import commitments.

“Even though, some progress has been made, our foreign exchange earnings as well as government revenue are still highly dependent on changes in oil prices and Nigeria’s oil production levels. In the absence of strong fiscal buffers, our economy remains vulnerable to global market conditions that affect the demand and supply of crude oil.

“Furthermore, investment flows to emerging markets have been affected by the trade wars and the uncertainties surrounding its resolution are pushing investors into retreating to investing in safe assets such as US treasury bills.

“In Sub-Saharan Africa, growth is expected to remain flat at 3.2 per cent in 2019. This is due to the slowdown in global growth along with reduced demand for commodities in key markets such as China and India. Declining commodity prices is expected to affect key export markets such as Nigeria, Ethiopia and South Africa.

“In addition, the retreat in financial flows from emerging markets is elevating debt vulnerabilities for countries with high external debt, as the cost of financing their debts have risen along with reduced incomes particularly in the case of export facing economies.

“According to the US Energy Information Administration (EIA), global oil demand is expected to grow by less than 1m/bpd in 2019. The EIA estimates that average crude oil prices would decline from $71 in 2018 to $63 in 2019 and are likely to decline further to an average of $59 in 2020.

“We will continue to operate a managed float exchange rate regime in order to reduce the impact which continuous volatility in the exchange rate could have on our economy.We intend to aggressively implement our N500bn facility aimed at supporting the growth of our non-oil exports, which will help to improve non-oil export earnings.

“We will also work with our counterparts in the fiscal arm in supporting improved Foreign Direct Investments (FDI) flows to various sectors  such as agriculture, manufacturing, insurance and infrastructure. These measures while supporting improved inflows into the country, will help to stabilize our exchange rate and build our external reserves.”


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