By Babajide Komolafe
With the nation’s external reserves falling below its lowest level in eighteen months, economic experts are divided over the policy of using the reserves to defend the naira.
A snap poll of foreign exchange dealers and economic experts conducted by Financial Vanguard on the likely outcome of the meeting of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) holding today and tomorrow revealed divergence of opinions on the policy of using the reserves to defend the naira.
The poll revealed that while foreign exchange market operators prefer that the CBN suspends the policy by allowing depreciation of the naira, other operators however prefer that the apex bank maintain the status quo.
Last week, the external reserves fell further to $38.13 billion, representing the lowest level since August 2012. The decline in reserves started May last year after a peak of $48.85 billion in April. This implies that the reserves have shed $10.72 billion between May, 2013 and last week while it has declined by $5.48 billion this year.
The decline in reserves is attributable to depletion of the excess crude accounts and increased sales of dollars by the CBN in its quest to stablise the exchange rate. This year, the apex bank has sold $8.7 billion through the bi-weekly foreign exchange auction, representing 33.1 per cent of the $25.37 billion sold last year. The fear is that, if the apex bank maintained the policy of using reserves to defend the naira, the external reserves might continue to fall further.
Foreign exchange dealers who participated confidentially in the poll argued that with the current levels of reserves, the focus of the MPC should change to protecting the reserves. Hence they predicted that the MPC would shift the midpoint of the official exchange rate from N155 per dollar to N160 or N165 per dollar.
“No Naira should be devalued”, said a senior bank treasurer, who spoke on condition of anonymity. He believes that the MPC would raise the official rate to N165 per dollar from N155. A senior economic analyst with one of the banks, who does not want his name mentioned, argued for depreciation of the naira.
He told Vanguard, “There is a balanced outlook between the current efforts to support the naira and keep depleting the reserves or to preserve the reserves and move the midpoint to N160 per dollar plus/minus three percent. The latter will allow naira exchange rate in the interbank to oscillate to N164.8 per dollar. Interestingly, there is a resistant above N165 by the CBN, and also a resistant below N164 by the operators.
Whichever is the case, the latter option will suit all parties. Although this could be seen as indirect devaluation, but it might not, if we consider that the 2014 Budget benchmark is N160.” Supporting these views, Opeyemi Agbaje, Chief Executive Officer of RTC Consulting Limited, said, “sensible policy will be some depreciation”.
Some operators however differ. These include Managing director/Chief Executive, Partnership Finance and Investment Company PLC, Mr. Victor Ogiemwonyin and President, Finance House Association of Nigeria (FHAN), Mr. Samuel Durojaiye. “We cannot afford to devalue the Naira now, the negative fallout has too many unpredictable outcomes.
I believe CBN will keep supporting the currency because it will cost us less than wholesale devaluation that will have no end. Though, our foreign reserves are below $37b now. My feeling is that as the western economies recover, oil prices will gradually rise to boost the current reserves level”, Ogiemwonyin.
According to Durojaiye, “The issue is what will support our economy. Our economy is import dependent. If you devalue our currency, imports will become expensive cost of production will increase. The argument that such a step will promote export will bring only little gains. What do we have to export?
Furthermore, two major investment firms Financial Derivatives Company (FDC) Limited and Bank of America expressed different opinions on whether the CBN should continue to defend the naira.
While the FDC in a monthly report issued last week agued for depreciation of the naira, the Bank of America said that there is no need for such depreciation now.
According to the FDC report, “We anticipate two possible scenarios alongside the hike in CRR. The first scenario is a shift in the exchange rate midpoint from N155 to N165 per dollar, which is estimated 3-5 percent depreciation in the naira. The rationale for this is the increased volatility recorded at the interbank and parallel markets, and the CBN’s continued support of the naira at a cost to external reserves. The premium between the official and parallel market remains wide at N16.26 compared to N8.25 in October, 2013. Our second scenario is an increase in the MPR to 13 percent per annum to tighten liquidity conditions in the money market.”
The Bank of America however stated, “We expect the MPC to keep the Monetary Policy Rate (MPR) on hold at 12.00 percent per annum given that the recent elevated levels of dollar sales by the CBN have successfully brought the Naira down from last month’s highs. This means there is no immediate need for a rate hike, in our view. However, there is a small chance the exchange rate band could be slightly adjusted.
The CBN has been selling roughly $400 million per auction for the past month, compared with an average of $300 million per auction in 2013. Its intervention brought the Naira down by three percent from N169 on 20 February to N163 in just two weeks. Reserves currently stand at $39 billion. Clearly the CBN can sustain net outflows for some time before reserves fall to the $32 billion level seen at the time of the last devaluation in November 2011. This was equivalent to five months of import cover compared with just under nine months of import cover currently available.
Reserves are clearly sufficient to defend the Naira band in the medium term, and we believe exchange rate stability continues to be at the core of MPC policy given the high degree of exchange rate pass-through into inflation. This is especially true given that the February core CPI ticked up slightly to 8.0 percent year-on-year. Therefore, we see only a small chance that the current exchange rate band will be moved.”