MPC members raise red flag over reserves free fall

By Moses Obajemu and Omobayo Azeez

• One CBN deputy governor‭, ‬one senior member express concerns
• Fear of exchange crisis‭, ‬capital outflows

A deputy governor of the Central Bank of Nigeria (CBN) and a member of the Monetary Policy Committee (MPC), have expressed fears that the persistent fall of Nigeria’s external reserves in recent times may induce exchange rate crisis and trigger capital outflows from the country.

Joseph Nnanna and Robert Asogwa, deputy governor in charge of economic policy and an MPC member respectively, expressed fears in their personal statements at the last meeting of the MPC seen by Business a.m.

Reviewing the external reserves movement, Nnanna said external reserves had trended downwards in recent months, declining from US$43.971 billion as at July 31, 2019 to US$ 41.79 billion as at September 16, 2019 or by US$ 2.181 billion or 4.9 percent.

Data from the Central Bank of Nigeria (CBN) has since shown that the reserves shed $2,243,157,059 in October, moving from $44,305,099,104 on the last working day of September to $42,061,942,045 as at October 30, 2018, the largest fall since 2018.

The reserves depreciation reflects weakening oil prices and CBN interventions in the foreign exchange market to ensure exchange rate and price stability.

“Although this stock of reserves could finance over 9 months of 36 imports of goods and services at end July 2019, there is need to watch this level considering that the reserves stock at the end of June 2019 could finance over 12 months imports.

“More importantly, the level of reserves has implications for capital inflows and outflows. A weakened net capital inflows position, due to weakening oil prices and external reserves position is helpful to exchange rate stability or the easing of monetary policy stance.

“This thus suggests the need to avoid monetary policy responses that could worsen the capital flows position and, hence external reserves and exchange rate stability,” Nnanna submitted at the last meeting of the MPC.

Asogwa, in his submission, explained that some considerable pressures still exist as the conditions of external reserves and current account balance seemed to have worsened in between the MPC meetings.

“CBN staff report shows that gross external reserves as at end of August 2019 declined by 4.7 percent when compared to the levels at end July and there are expectations of additional declines by the fourth quarter of 2019.

“There are, however, fears that this declining trend in external reserves may affect exchange rate stability in the near future,” he said.

The country’s foreign reserves, which saw a remarkable surge in 2018, following improved oil prices, and hitting $47.8 billion in June, has begun to take a downward turn due to shocks from the US market.

On September 26, 2018, the US Federal Reserve decided to lift its benchmark overnight lending rate by a quarter of a percentage point to a range of two percent to 2.25 percent.

This has made the biggest economy in the world more attractive to investors, who have since started voting with their pockets by moving their monies out of emerging markets like Nigeria, causing potential currency fluctuations and depreciation.

To avoid depreciation of the naira, the CBN has decided to continuously intervene in the foreign exchange market to keep the naira stable at 360 to 364 to the dollar.

Explaining this in Bali, Indonesia, at the just concluded World Bank and IMF meetings, Godwin Emefiele, the CBN governor said the bank will save the naira rather than build more reserves.

Meanwhile, Nigeria’s foreign reserves have plunged from a total of $41.77 as at October 2 to $40.50 by October 30.

CBN’s records show that on the average, the country’s foreign reserves lost an approximately $43.61 million daily between October 2 and October 30.

The reduction in foreign reserves may be due to a slowdown in foreign direct investments, low oil prices, debt servicing obligations and continued intervention in the foreign exchange market by the CBN, experts have observed.

Despite assurance in some quarters however, concerns have continued to mount over the development since the survival of the local currency and the economy largely depend on the figures of the nation’s foreign reserves.

Consequently, the performance of the naira was mixed, across the main foreign exchange (FX) windows.

The local unit shed points at the CBN official window, as the FX rate depreciated by 2 basis points week-on-week (w/w), to close at N307/$1.

At the importer and exporter window (I&E) FX window, the local unit appreciated by 2bps w/w to settle at N362.75/$1, while, the FX rate at the parallel market traded flat w/w at N359.0/$1.

Activity levels at the I&E FX window were buoyant, as average daily turnover increased by 93.1 per cent w/w to $322.3 million.

FX data obtained from authorities also indicated that gross reserves continued to deplete, down by 5bps w/w to $40.5 billion.

According to analysts, “Overall, we expect pressure on the foreign reserves to continue in the near term as apex bank continues to intervene in a bid to stabilize the naira.”