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External reserves drop by $4.72bn in four months

By on May 13, 2014

The country’s external reserves being managed by the Central Bank of Nigeria have witnessed a massive decline of $4.72bn in the last four months, investigations have revealed.

Figures obtained from the CBN revealed that the external reserves amounted to $42.85bn at the end of December 2013.

However, it was gathered that owing to severe pressure, which the naira had faced in recent times, coupled with the pressure to meet the foreign exchange demand, the central bank had drawn down the reserves by 11 per cent to $38.13bn as of April 30, 2014.

The decrease in the reserves, the findings showed, was driven largely by the increased funding of the foreign exchange market in the face of intense pressure on the naira and the need to maintain stability.

Investigations at the foreign exchange market revealed that the exchange rate had, within the last four months, been moving in an unpredictable manner.

For instance, while the exchange rate remained stable at the Retail Dutch Auction System window, it depreciated at the interbank but appreciated at the Bureau de Change segment of the market.

Findings revealed that the exchange rate at the RDAS during the review period opened at N157.61 to a dollar (including one per cent commission) and closed at N157.26 to a dollar, representing an appreciation of 35 kobo or 0.22 per cent.

At the interbank foreign exchange market, the rate opened at N158.83 to a dollar and closed at N164.90, representing a depreciation of 3.68 per cent or N6 for the period.

Similarly, at the BDC segment of the foreign exchange market, the selling rate opened at N173 to a dollar and closed at N172.00, representing an appreciation of 0.58 per cent or N1.

Financial analysts, who spoke on the development, noted that the recent pressure in the foreign exchange market was in response to key developments in the United States over the Fed’s unwinding of its assets purchase programme.

In addition, they said the pressure on the external reserves was deemed to be consistent with the seasonal annual payment of dividends to foreign investors.

Those who spoke on the issue were the Registrar/Chief Executive Officer, Chartered Institute of Finance and Control, Mr. Godwin Eohoi; and the Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane.

They commended the central bank for its continued commitment to exchange rate stability in the face of undue pressure on the naira, but noted that the stability had been maintained at a high cost.

Both analysts were also of the opinion that safeguarding short, run macroeconomic stability under the circumstance required firm and bold measures.

For instance, Rewane said the drop in global commodity prices as well as the need to redirect the economy following the outcome of the rebasing of the country’s Gross Domestic Product had made the depreciation of the naira inevitable.

He predicted that the currency pressure would continue to increase; adding that the monetary tightening measures currently being adopted by the CBN was a temporary solution to the exchange rate problem.

According to him, the divergence between the official and parallel market exchange rates has now risen to N6, noting that the huge decline in external reserves had made it imperative for the CBN to depreciate the naira.

The Financial Derivatives boss said since a country’s terms of trade were determine by the value of its currency, there was a need for monetary authorities to consider the depreciation of the naira by three per cent from between N150 and N160 to a dollar, to N155 and N165.

Rewane said, “There is a need for an adjustment in the currency value. We need a depreciation of the currency because anything less than 10 per cent is not devaluation but depreciation.

“The adjustment we are talking about is moving the band from between N150 and N160 to N155 and N165 to a dollar. So, if you have a three per cent movement, it is not going to destroy the country.

“Commodity prices globally have actually gone down even below the adjustment of the currency. Aluminium prices have gone down by about 40 per cent and wheat prices have come down by almost 25 per cent.

“So, most of the raw materials that they are talking about have come down and will be affected by the depreciation of the currency.”

He argued that since the economies of most of the trading partners of Nigeria were not controlled by the dollar, a three per cent depreciation of the nation’s currency would not harm the economy.

Rewane said the depreciation of the naira could be used as a strategic tool for redirecting the economy in line with current economic realities.

He said, “Currencies are measured against our trading partners and the Nigerian currency is measured in relation to a dollar, but our trading partners are mainly non-dollar countries.

“So, against other currencies such as the euro, pounds, the Japanese yen and the Chinese yuan, you will find out that our currency even if you adjust by three per cent against the dollar since the dollar is getting stronger, you will find out that our currency has not actually deteriorated.

“Currency value determines the terms of trade and the terms of trade has moved against us and we need to make an adjustment

“So, you can use the adjustment of the currency as a strategic tool for moving your economy in a particular direction. This is something that we have to think about.”

Eohoi said that as the new central bank governor resumes next month, increase in foreign reserves, exchange rate stability and attraction of foreign direct investment should be his focus for the economy.

He said, “The CBN has done well in bringing inflation under control at single digit. What we experienced in 2013 is the total control of inflation in the entire economy, and you can see that inflation has been reduced and that is why people complain about paucity of funds.

“In the area of reserves, we had strong reserves in 2013 compared to 2012. But when you look at the exchange rate, there is still much work to be done because the policies being introduced have not actually taken us to where we should be.

“So, what we are expecting for 2014 is stronger naira to the dollar. We want the CBN to achieve an exchange rate of about N130 to the dollar. We also want the CBN to boost the foreign reserves in 2014 as against what we had in 2013.”

The Acting Governor, CBN, Dr. Sarah Alade, had repeatedly ruled out the possibility of naira devaluation in spite of severe pressure in the foreign exchange market following the removal of Lamido Sanusi.

She had said that the bank would continue to intervene in the foreign exchange market to meet the demands of all foreign exchange users.

Alade had said, “Let me reassure stakeholders that the CBN will continue to intervene in the interbank foreign exchange market to ensure the stability of the exchange rate of the naira and preserve the value of the domestic currency.

“I wish to use this opportunity to reassure you that the management of the CBN remains committed to monetary and price stability, and the smooth functioning of the foreign exchange market.

“Let me reassure all stakeholders once again that the bank has no immediate plans to devalue the naira.”

 

 

[Punch]