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CBN expresses concern over external reserves depletion

By on May 22, 2014

The Monetary Policy Committee of the Central Bank of Nigeria on Tuesday expressed concern over the drop in fiscal buffers, stating that the development had exposed the economy to vulnerabilities arising from both domestic and external shocks.

The committee, at the end of its meeting at the central bank headquarters in Abuja, noted that the erosion had accentuated the regime of persistently high interest rates as well as elevated demand for foreign exchange.

Addressing journalists shortly after the two-day meeting, the Acting Governor, CBN, Dr. Sarah Alade, explained that following the depletion of the external reserves, the committee had mandated the management of the bank to continue to monitor developments in the fiscal space, with a view to taking appropriate monetary policy actions.

She put the country’s gross external reserves as of May 15, 2014 at $38.30bn, compared with $37.40bn at the end of March and $42.85bn by December 2013.

Alade, however, added that despite the depletion, the current level of the country’s external reserves could provide approximately nine months of import cover.

She warned that from the external environment, the prospects for increased yields and interest rates in the United States and the low level of economic activity in the emerging markets could have repercussions for foreign exchange inflows and stability of the naira exchange rate.

On the domestic front, the acting governor listed the high banking system liquidity, elevated security concerns, and anticipated high spending in the run-up to the 2015 general elections as some of the key risks to the domestic economy.

For instance, Alade pointed out that the current high domestic liquidity could exert sustained pressure on both the exchange rate and consumer prices as well as accentuate the already high demand for foreign exchange.

These, according to her, can further deplete the country’s external reserves.

In addition, the CBN boss said that core inflation had continued to send conflicting signals since January 2014, noting that if the upward trend continued as observed in April, it could be a major factor in the upward trend in prices.

The acting governor said, “The committee noted with satisfaction Nigeria’s overall domestic economic environment, which has remained stable with inflation contained within the target range, the recent stability in the foreign exchange market, stable interbank rates and strong growth outlook.

“The key challenge for policy, in the committee’s view, was that of sustaining and deepening the outcomes of existing policies. It noted, also, that over the medium term, the major risks to price stability appeared to be emanating from both external and internal sources.

“The committee also expressed concern over the eroded fiscal buffers, which have exposed the economy to vulnerabilities arising from both domestic and external shocks. The erosion has accentuated the regime of persistently high interest rates, elevated demand for foreign exchange and declining reserves accretion.

On monetary policy direction for the next two months, Alade said the committee unanimously voted to retain the current stance of the monetary policy.

Consequently, she said the committee voted to hold the Monetary Policy Rate at 12 per cent; keep the Cash Reserves Requirement on public sector deposits at 75 per cent, and CRR on private sector deposits at 15 per cent.

In addition, Alade stated that the committee voted to retain the MPR corridor at +/-200 basis points.

 

 

[Punch]