Falling reserves cast doubt over CBN’s naira defence – Today.ng


There are growing doubts over Central Bank of Nigeria’s (CBN) ability to defend the naira following the steady decline in the country’s foreign exchange reserves.

CBN data shows that the reserves stood at $25.8 billion on August 16, the lowest since 2005 and down from almost $50 billion in 2013.

They now equate to less than six months of imports, which undermines the apex bank’s ability to defend the naira, according to analysts at Rand Merchant Bank.

The naira reached a record low of N365.25 against the dollar on Thursday, its worst decline on the interbank forex market since the new flexible exchange rate policy commenced.

Indeed, forex dealers point out that but for the CBN’s interventions almost on a daily basis to boost liquidity in the market via dollar sales, the naira would have fared much worse against the dollar.

Market analysts attribute poor liquidity in the market and the attendant weakness of the naira to the continued reluctance of foreign investors to return to the country despite several measures introduced by the CBN to lure them back.

In addition to liberalising the forex market, the regulator has hiked interest rates from 12 per cent to 14 per cent and it has been offering treasury bills at high rates to attract offshore flows into the country.

As a forex trader put it: “The Central Bank is trying to drive the economy with bills and bonds; they are offering securities at such high yields.”

Also, in a move it said will help narrow the wide gap between the official and parallel market rates as well as boost dollar liquidity, the CBN last month told international money transfer operators to pay dollar proceeds from customer transfers into local commercial banks in naira, while selling the dollars themselves to Bureaux de Change (BDC) outlets.

A few days ago, the banking watchdog pegged the dollar transactions which banks can carry out with BDCs at $50,000 per week and set a margin for the banks to sell dollar to currency outlets at not more than 1.5 per cent over the rate at which they bought.

However, a treasurer at a tier one bank, who asked not to be named, argued that unless there was significant accretion to the foreign reserves, the CBN would not be able to sustain its defence of the naira.

He said: “The key to the CBN’s continued defence of the naira depends on the level of the country’s foreign reserves. Given that the price of crude oil, our major export, is still below $50 per barrel, I don’t see the reserves recovering anytime soon. So unless foreign investors agree to return, the naira will continue to depreciate against the dollar.”