External reserves drop by $2.4b in one month

Latest data by the Central Bank of Nigeria (CBN) shows that the nation’s external reserves continued to decline, amidst the spirited defence of the Naira.

The reserves closed at $30.155 billion on March 17, according to the CBN website monitored on Thursday, representing a $1.2 billion or 3.83 per cent depletion month-to-date, compared with $31.356 billion at the end of February.

Further analysis also showed that on a month-on-month basis, the nation’s foreign exchange reserves fell by $2.393 billion or 7.35 per cent compared to its $32.548 billion closing figure on February 17.

So far, the reserves have dropped by $4.313 billion year-to-date, representing a decline of about 12.51 per cent from $34.468 billion reported at the end of 2014, as the price of crude at the international market continued to drop sharply.

Brent crude sold at $54.53 per barrel, slightly above the $53 benchmark adopted for the 2015 Appropriation Bill now before the National Assembly. The current price, however, represents a $3.01 drop from the $57.53 it changed hands on December 31, last year.

The CBN, as part of duty to ensure exchange rate stability, which is one of its core mandates, has continued its spirited defence of the Naira against the US$ and other global currencies. In the process, it has been forced twice in the past five months to officially devalue the Naira, first from the N155-N160/$1 to N186 and later N198 when it merged the retail and wholesale Dutch Auction System to curb speculation.

Chief Executive of Financial Derivatives Limited, Bismarck Rewane, estimated in his executive breakfast meeting at the Lagos Business School for the month of February that the CBN may have spent about $1.74 billion to defend the Naira in January. This, he said, “represents an increase of $0.53 billion or 43.8 per cent over the $1.21 billion sold at the Retail Dutch Auction System (RDAS) in December 2014.”

Meanwhile, analysts at Lagos-based investment banking group- FSDH Merchant Bank Limited, on Thursday, released their thoughts for next week’s meeting of the CBN’s Monetary Policy Committee (MPC), slated for between March 23 and 24, 2015.

The report recalled that at the end of its January 2015 meeting, the MPC maintained all its rates, after which in the face of the declining oil price and the external reserves, it suspended the rDAS window, leading to a devaluation of the Naira.

The analysts believe that the MPC members would likely vote against any hike in rates as it would be counter-productive under the current circumstance, if the CBN must avoid further giving banks reasons not to lend to the private sector.

They forecast 5.68 per cent GDP growth for 2015, “representing a decline from 6.22 per cent in 2014. Thus, under the current situation, a rate hike may further lead to a weakness in the GDP growth rate. This expectation is based on the expected rise in the inflation rate, weak fiscal position of the Federal Government of Nigeria (FGN) and the expected increased borrowing from the market.”

Although inflation rate remains in the preferred single digit of the CBN at 8.4 per cent, with a combination of monetary tightening and favourable prices in the international market moderating the negative impact of the supply bottlenecks in the country, they expect it to hit double digit between March and May.

Also, the report noted that “the recent recovery in the oil price has not been visibly reflected in the external reserves, as demand for foreign exchange rate remained at elevated levels. The external reserves position declined by about US$4.12 billion between the last MPC meeting in January to close at US$30.34bn as at March 13, 2015.

“The IMF believes the external reserves would drop to about US$28 billion by year end. Looking at the current and the short-to-medium term outlook for the Nigerian economy and the financial system, we are of the opinion that the MPC would vote to maintain rates at the current levels, as any decision to increase rates would hurt the fiscal position of the government at all levels and that of the private sector. A rate cut may lead to a capital flight, which would hurt the economy and the financial system,” the report added.

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