Don't Miss


Home   >   Market - Finance   >   Finance   >   Reserves, Excess Crude Account depletion threatens economy – CBN

Reserves, Excess Crude Account depletion threatens economy – CBN

By on January 23, 2014

The Monetary Policy Committee of the Central Bank of Nigeria on Tuesday expressed concern over the continued depletion of the Excess Crude Account, external reserves and portfolio inflows into the country.

The committee said the country had in the past one year witnessed a massive decline of $9bn in the ECA from $11.5bn in December 2012 to less than $2.5bn on January 17, 2014.

It stated that the gross external reserves as of December 31, 2013 stood at $42.85bn, representing a decrease of $980m or 2.23 per cent compared with $43.83bn at the end of December 2012.

The committee noted that the decrease in the reserves level resulted largely from a slowdown in portfolio and Foreign Direct Investment flows in the fourth quarter of 2013.

This, it noted, had resulted in increased funding of the foreign exchange market by the central bank in a bid to stabilise the naira.

Addressing journalists at the bank’s headquarters in Abuja at the end of the two-day meeting, the CBN Governor, Mr. Lamido Sanusi, said the absence of fiscal buffers had increased the country’s reliance on portfolio flows.

This, he noted, constituted a principal risk to the exchange rate stability, especially with uncertainties around capital flows and oil price.

He said while the committee welcomed the sustained stability of the exchange rate and single digit inflation in 2013, it, however, identified four key concerns for policy in the short to medium-term.

The concerns are depletion of fiscal buffers following the continued decline in oil revenue; rundown of reserves and depletion excess crude oil savings; falling portfolio and FDI inflows; widening gap between the official and the Bureau de Change exchange rates; and creeping increase in core inflation.

On the depletion of fiscal buffers, Sanusi said the committee decried the continuous fall in revenue from oil, despite stable prices of the commodity and production in 2013.

He said although the committee acknowledged output losses due to theft and vandalism, this could not wholly explain the magnitude of the shortfall in revenue

As a consequence, remittances to the external reserves remain low, while much of the previous savings have been depleted, thereby undermining the ability of the central bank to sustain exchange rate stability.

The committee, therefore, urged the fiscal authorities to block revenue leakages and rebuild fiscal savings needed to sustain confidence and preserve the value of the naira.

When asked for the reason for the massive depletion in the ECA, the governor said, “It’s a fiscal issue and not a monetary issue, and all we’ve done is to point out the realities. We had $11.5bn excess crude savings at the end of 2012 and we have less than $2.5bn in 2014, and that is the fact.

“And this is giving us cause for concern and also to the Finance minister, and I suppose ongoing discussions will begin to reveal some of the reasons for that dramatic decline.”

Sanusi said 2014 would be difficult for monetary policy for various reasons.

Some of them are external sector developments such as reduction of stimulus in the United States; uncertainties about who becomes the next governor of the CBN; election spending and revenue shortfalls.

Sanusi said, “The year 2014 will be a difficult year for a number of reasons; there are a lot of external developments, which will have consequences on inflows. As the inflow begins to slowdown, we need to be able to stop the theft, vandalism, leakages and basically save our own money in order to build up reserves, and that’s a fiscal issue because oil prices are on an average of $110.

“The collapse between 2012 and 2013 was less than $2 per barrel and there is no reason why oil revenues should have collapsed from N8tn to under N7tn in one year.

“We need to tighten control; we need to check where the money is going. It will be tough for us, it will be tough for the fiscal authorities and elections are coming up in 2015. And one of the good stories of not having a lot of money in the ECA is that there is little ammunition to spend money.”

Sanusi stated that the reduction of the US stimulus could, in addition, trigger capital flow reversals and put greater pressure on the naira exchange rate.

He expressed concern about the widening gap between the official and the BDC exchange rates, noting that this could precipitate speculation and round-tripping.

The governor said though the BDCs represented a small component of the foreign exchange market, the widening spread appeared to have fed into creeping increases in core inflation.

He, however, re-affirmed the CBN’s commitment to a stable exchange rate regime, while urging the fiscal authorities to provide support by reducing fiscal leakages, improving controls around oil revenues and reviewing terms around production sharing agreements with oil companies, while awaiting the passage of the Petroleum Industry Bill.

Sanusi said, “The committee also noted the necessity for a complementary monetary policy response to ensure sustained exchange rate stability and convergence of rates in various segments.

“In the light of this, two options were considered – allowing a depreciation of the currency to avoid further tightening and depletion of reserves; and maintaining our commitment to currency stability, while stressing that monetary policy is almost at its limits and needs support from the fiscal side in the form of excess crude savings if currency stability is to be maintained in the future.”

But the CBN governor said the committee decided that the costs of a weaker naira far outweighed the benefits to the Nigerian economy and the core mandate of the CBN.

It, therefore, opted to maintain its commitment to currency stability.

Having looked at all the options, the committee decided against excessive reliance on the external reserves to support the exchange rate and opted for monetary tightening until fiscal buffers were rebuilt.

To this end, he said the committee unanimously decided to increase the Cash Reserve Requirements on public sector deposits from 50 per cent to 75 per cent with effect from February 4, 2014.

It also maintained the Monetary Policy Rate at 12 per cent, liquidity ratio at 30 per cent and private sector CRR at 12 per cent.

On what was being done to address the supply-demand imbalance in the BDC segment, Sanusi said, “We’ve made a number of interventions that were aimed at addressing the suspicion of money laundering. These include, for example, limiting the amount of dollars that banks can sell to the BDCs to $250,000 per week.

“Now that obviously disrupted the equilibrium in the market because it created a shortage of supply, and we now have to look closely at how to begin to redress that imbalance.

“What we need to do is to make sure it does not become a disruptive force as we fight money laundering and we do not allow the market get to a level where there is no control over the use of foreign currency.”

Sanusi said within the next three days, the CBN would come up with administrative measures to redress some of the supply-demand discrepancies.

He also said the bank would strengthen its surveillance and other market-friendly approaches that had so far been taken against money laundering.

 

 

[Punch]