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External reserves may drop below $40bn – Experts

By on February 25, 2014

Indications have emerged that the nation’s external reserves, which stood at $44bn at the beginning of last year, will likely go below the $40bn mark before the end of the first quarter of this year.

Experts say the drop is expected to save the naira from further depreciation.

The latest statistics on the Central Bank of Nigeria’s website showed that the reserves have dropped by $2.3bn so far this year.

The reserves, which closed 2013 at $43.6bn, fell by $2.3bn to  stay at $41.30bn on February 19, 2014.

The reserves had fallen to the $45bn mark on September 20, 2013, and hovered around $45bn until November 8 when it dropped to the $44bn mark.

Renaissance Capital, in its Economic and Political Research Report the forecast an $8bn decline in  forex reserves to $35bn this year.

The report obtained by our correspondent stated, “The last time the CBN devalued the naira was YE11, following the $11bn drop in FX reserves in 2011. We forecast an $8bn decline in Nigeria’s FX reserves to $35bn at YE14. If, however, the FX reserves fall to $30bn, ceteris paribus, our naira econometric model forecasts a sharper depreciation to N168/$1 at year-end 2014 (our base case YE13 forecast is N164/$1).

“In this scenario, we think the new CBN governor may be compelled to adjust the naira exchange rate band to N160-170/$1, from N150-160/$1 now. FX reserves have fallen by $7bn since their post-global crisis peak of $49bn in April 2013. We believe they (reserves) will likely fall further in 2014 on the back of oil production and higher imports due to election-related spending.

“We think the cumulative deterioration in   Nigeria’s external position in 2013 and 2014 implies devaluation in 2015, after the elections; a devaluation before the elections would be unpopular for an import-dependent nation. We think a N160-170/$1 target range is likely. One upside for the government from a weaker naira would be more naira from dollar oil tax revenue.”

The naira fell to a record low of N169 to the dollar before trading stopped last Thursday owing to volatility caused by the suspension of the CBN Governor, Mr. Lamido Sanusi.

The country’s forex, bond and money markets all stopped trading after Sanusi’s suspension was announced.

“The market is frozen right now because no one wants to take position,” Reuters quoted a dealer as saying on Thursday.

Last year, in a bid to defend the naira from further devaluation, the CBN sold about $26.6bn from the reserves to dealers at the auction market.

In 2012, the Minister of Finance, Mrs. Ngozi Okonjo-Iweala, set a target of $50bn for the reserves. But the reserves closed the year with $44bn, finishing $6bn below the target.

Two weeks ago, Sanusi  had emphasised the need to build up the external reserves in order to protect the economy against external shocks.

Out of the over $42bn in the reserves, he noted that about $20bn represented portfolio investment, which could flow out of the country at any time in case of shocks.

He lamented how the Excess Crude Account had been depleted from $11.5bn to $2.5bn within one year.

According to him, the country needs to plug all leakages in its oil revenue system to enable it to build the reserves and defend the exchange rate effectively.

Sanusi had said, “You look at how some emerging markets’ currencies are falling. This stability we have built for five years can unravel overnight.

“We cannot take this stability for granted. It is very fragile and the way to keep it is to put in those controls: stop the theft; stop the leakages; build the reserves and then we can have lower interest rates and low inflation. We have to attack the root of the problem.”

Last year, the regulator resumed direct intervention by selling dollars to end users in the market.

Our correspondent learnt that the regulator took the decision in order not to devalue the naira.

There had been speculation that the CBN would devalue the naira, thereby fuelling excessive demand of the currency.

A reliable source in the CBN had told our correspondent, “The CBN has resumed intervention by selling dollars to end-users. The bank has a dealing whereby it sells to the WDAS, but very rarely sells to end-users directly.

“If the market is tight, it can sell or buy from end users, but it is uncommon.

“The implication is to increase the supply and make the naira appreciate.”

 

 

[Punch]