Slowdown in reserves accretion casts cloud over naira stability


Despite Central Bank of Nigeria (CBN)’s consistent declaration of its commitment to defend the naira, the slowdown in the country’s pace of external reserves accumulation in recent months is raising questions about the apex bank’s long term capacity to support the local currency, New Telegraph has learnt.


While data obtained from CBN’s website indicates that the regulator’s dollar buffers increased by $192.47 million in the month of June to stand at $47.79 billion as at June 29, 2018, compared with an appreciation of $108.82 million in the previous month where they stood at $47.62 billion as at May 30, an analysis of earlier months’ figures show a sharp slowdown in the pace of reserves accretion.


Specifically, the CBN’s data indicates that the external reserves increased by $986.10 million in the month of April, rising from $46.51 billion on April 3 to $47.50 billion on April 30, 2018.


Also, the reserves increased by $3.63 billion in the month of March, soaring from $42.63 billion on March 1 to $46.23 billion on March 29.

Similarly, the foreign exchange reserves jumped by $1.74 billion in the month of February from $40.76 billion on February 1, to $42.50 billion on February 28.


Almost the same pace of accretion was recorded in the reserves for the month of January, as the CBN data shows that they increased by $1.77 billion from $38.92 billion on January 2 to $40.69 billion on January 31, 2018.


Further analysis of the data shows the CBN’s dollar buffers had their highest rate of accretion in the month of March ($3.63 billion), while the lowest rate so far was recorded in the month of May ($108.82 million).


Analysts attribute this to increased dollar sales by CBN in May as part of efforts to curb speculative attacks on naira, which led to the local currency depreciating by N2 in the parallel market from N363/$ to N365 per dollar.


Indeed, an analysis of CBN’s interventions in the interbank forex market by Financial Derivatives Company (FDC) indicate that the banking watchdog sold a total of $1.43 billion in May compared to $837 million in April.


It would be recalled that in its bid to address the surge in demand for dollars, CBN, on May 27, unveiled new forex measures, in which it directed commercial banks and Bureaux De Change (BDCs) to sell foreign exchange to all eligible travellers over the counter, regardless of their customer status.


It also ordered BDCs to purchase forex from it (CBN) thrice weekly, warning that it would review the license of any operator that fails to comply with this directive.


Investigations by this newspaper reveal that from June 1 when it started implementing the new forex measures for BDCs to June 30, CBN may likely have sold a total of $958.4 million to the 4,106 licensed BDCs in the country, given that each of the money changers must buy $60,000 weekly ( $20,000 per operator on Mondays, Wednesdays and Fridays) from the apex bank.


Interestingly, the Managing Director of a Lagos-based BDC who did not want to be named said that an additional measure introduced by CBN, which allowed BDCs to buy dollars from it at commercial banks’ dollar buying rate of  N357/$1 and sell at N360 per dollar, has made most BDCs to again take a keen interest in purchasing dollars from the regulator.


In fact, a recent report by this newspaper showed that CBN must have pumped about $2.60 billion into forex market last June. This figure is arrived at from totalling the $958.4 million the banking watchdog sold to BDCs and the $1.62 billion it sold in the interbank forex market during the period.


However, financial experts have warned that although CBN has succeeded in maintaining exchange rate stability, the significant increase in the amount of dollars that it is injecting into the forex market will negatively impact the nation’s external reserves, making it difficult for CBN to meet its $50 billion reserves target by the end of this year.


They pointed out that a slowdown in reserves accretion will hinder CBN’s capacity to sustain exchange rate stability.


For instance, in a recent note, analysts at FDC stated: “External reserves declined by 0.33 per cent from $47.78 billion on May 16 to $47.62 billion on May 30. The decline was driven primarily by an increase in CBN’s intervention to address rising forex demand pressures. The increased strain on external reserves has reduced the import cover from 13.27 months to 13.24 months within the period.”


But expressing confidence in CBN’s capacity to continue to defend the naira, the FDC analysts pointed out that the current level of the country’s reserves is still strong enough to allow the regulator intervene in the event of an economic shock.


“We expect robust oil proceeds to mitigate the impact of heightened forex demand pressures on the external reserves in the near term,” they stated.


Significantly, the analysts’ position was corroborated by the Bankers’ Committee after its recent meeting in Lagos, when it assured Nigerians that CBN had the capacity to defend the naira.


The Director, Banking Supervision (CBN), Mr. Ahmad Abdullahi, said at the event: “Generally, what the committee came to recognise is that CBN has enough arsenal to ensure that we have a stable exchange rate; any demand for forex will be met and ensure liquidity in the forex market. So, despite the mixed signals from the global economy and the likelihood of capital outflow, CBN is prepared to deal with the situation and ensure stability in the forex market.”