04 June 2014, Abuja – Godwin Emefiele, 53, immediate past Group Managing Director of Zenith Bank Plc has resumed as the 11th Governor and chief executive of the Central Bank of Nigeria, CBN. One of the major concerns that stare him in the face, no doubt, is how to stem the continued hemorrhage of the nation’s external reserves.
The hemorrhage is even more significant, when the latest figure is compared with that of the corresponding period of last year, which means that the nation’s reserve pool has depreciated by $11.45 billion or 23.65 per cent.
Latest data released by the apex bank on its website Monday evening showed that Nigeria’s foreign reserves closed red, shedding $1.178 billion or 3.09 per cent at the end of May. The level declined from $38.138 billion at the end of April to $36.959 billion last month, its lowest in recent times.
The decline in May represented a departure from the previous month, when the reserve grew by a slim $314.472 million or 0.83 per cent from $37.834 billion at the end of March.
On a year-to-date basis, the nation’s reserves lost $6.65 billion or 15.25 per cent from the $43.61 billion reported at the end of December, when it stood at $43.61 billion.
In a communiqué at the end of its regular meeting on May 19 and 20, 2014, the CBN’s Monetary Policy Committee (MPC) expressed worry that the reserve is depleting at a time Nigeria ought to build fiscal buffers.
According to a communiqué at the end of the meeting, signed by Dr. Sarah Alade, acting CBN Governor, the committee noted the existence of key internal risk factors including “the high systemic banking system liquidity, elevated security concerns and anticipated high election-related spending in the run-up to the 2015 general elections.
“High domestic liquidity could exert sustained pressure on both the exchange rate and consumer prices, as well as accentuate the already high demand for foreign exchange, further depleting the country’s external reserves. In addition, core inflation has continued to send conflicting signals since January 2014. If the upward trend continues, as observed in April 2014, it could be a major factor in the upward trend in prices.”
According to the CBN, the nation’s external reserves has fallen by $4.55 billion to $38.30 billion on May 15, representing a decline of about 10.61 per cent when compared with $42.85 billion at end-December 2013. The current level of the country’s external reserves, the CBN added, could provide approximately nine months of imports cover.
Mrs. Alade, on Tuesday in Abuja, handed over Emefiele as substantive governor, replacing Lamido Sanusi, who was suspended on February 20, 2014 by the Federal Government.
2015 and politicians
Sanusi may have noticed the trend that is today manifesting many months before now. In October last year, Sanusi explained an earlier announced ban on currency importation without prior approval, blaming it on the covetous demand for US$ by politicians preparing for the 2015 polls.
The CBN, Sanusi told Reuters, noticed a surge in dollar demand at forex bureaux in July, a pointer to the fact that something was amiss, after several months of spending huge resources to defend the Naira and ensure its stability. This has also dealt a heavy blow on the nation foreign reserves currently at an eighth-month low… .
Investigations, the governor further said, showed tens of billions of naira was traded for dollars in cash, much more than importers needed to buy goods or investors to repatriate funds, and there was no trace of where the money came from or where it was going.
“Obviously this was some form of money laundering to cover all the trails. And with interest rates as high as they are, the only people who can take that much Naira and buy dollars are people who are not borrowing their money.”
The prime suspects, he says, are politicians jockeying for position ahead of what look likely to be bitterly divisive 2015 polls. He also blamed the “dollarisation of the economy by political elites” for continued weakness of the naira, which he lamented, is despite the CBN’s moves to prop it up with dollar sales that have depleted its reserves to an eight-month low.
MPC members’ speak
According to details of deliberations at the last MPC meeting and how the members voted, released on Monday also by the apex bank on its website, members of the committee taking a holistic view of the economy, variously noted the need to beef up the nation’s reserve stock against shocks.
Adebayo Adelabu, who resumed as CBN Deputy Governor, Financial System Stability (FSS) in April, replacing Tunde Lemo, for example, spoke of the liquidity level in the banking system, particularly with “an average of N400 billion in daily SDF (Special Drawing Facility) since January and aggregate spending in the run-up to the 2015 general elections (which) may pose significant risk to inflation.”
He therefore called for policy response to rein in inflation expectation, which cannot be completely ignored at this time, in addition to “the declining external reserve and implication for exchange rate stability, which is a major challenge to nearly all developing economies at the moment. For us, the pressure is from both supply and demand sides.
“With increased global demand for oil due to recovery in the advanced economies, oil price would likely remain firm over the medium term. In effect, accretion to reserves is expected to improve,” he added.
Contributing to the debate on whether to raise or sustain the benchmark monetary rate, Alade noted the marginal reserves rise in April, “after declining in February and March as investors react to the perceived uncertainty in the market. This is as a result of increase revenue from oil and an attempt to strengthen the fiscal buffer by the government. Excess Crude Account (ECA) increased to $4.1 billion as at May 16, 2014 from $2.5 billion at the end of 2013, as government intensifies effort at rebuilding the fiscal buffers to forestall the downside risk to the domestic economy through foreign reserve depletion.”
She noted projection “that reserves build-up in the coming months will be sustained if prices stay steady on the back of high (oil) production and stable prices. The Naira has strengthened by two per cent in the past three months to reach Naira/US$162.40 as foreign investors return to the local bond market. Proper coordination between the fiscal and monetary authority have helped stir the economy safely out of the temporary macroeconomic shock it experienced earlier on the year.”
Suleiman Barau, deputy governor, in charge of Corporate Services, in his submission, adduced reasons for the foreign reserves stability, such as the “production level of crude (which) has been largely stable at about 1.876 bpd
“Oil price has maintained a floor above $100/barrel,” he added, stressing also that portfolio outflows have reversed and inflows are at pre-February 21 level, besides the fact that market sentiments have reversed.
Finally, he continued, “with tax holiday given to the Nigerian Liquefied Natural Gas Company just expiring, inflows from the petroleum sector would be diversified and enhanced. We see overall stability in the level of foreign reserves in the short run given the above demand and supply scenario for foreign exchange.”
Kingsley Muoghalu, DG in charge of Policy, said the depletion in foreign reserves was initially heightened by concerns generated by the leadership transition in the CBN, following which there was some stability.
This was however “at significant cost to “the nation’s) external reserves owing to the resolute interventions by the CBN in the forex market. Nigeria has had net inflows of foreign capital since April 2014. And with reserves at US$38.30 as at May 15, 2014, this provides approximately 9 months of import cover.
Another member, Chibuike Uche, also noted the challenge posed by the suspension of Sanusi early in the year, following which there was an “outflow of foreign portfolio investments (which) put pressure on both our external reserves and the value of our currency.
Late budget assent:
“Although these pressures have started to ease, difficulties remain. While the variance between the wholesale/retail/Dutch Auction System, interbank and Bureau De Change exchange rates narrowed in the recent past, it remains material. I am also aware that there are concerns about the fact that the 2014 budget has not been signed into law, growing insecurity in some parts of the country and the dwindling government revenues especially in the run up to an election year.”
He also expressed conviction “that a lot of the portfolio outflows that negatively impacted on our foreign reserves had more to do with the perceived uncertainties that arose from the recent leadership crisis in the Central Bank, and less with the inability of the Central Bank to tighten monetary policy and offer investors better rates of return, The fact that such portfolio outflows have tapered provide support for this view. More important however is the fact that there will be another change in the leadership of the CBN in a couple of weeks. I am of the view that policy changes should be undertaken at the present time only if absolutely necessary. From the above analysis, this is certainly not the case at this point,” he added.
Such recovery in confidence, Dr. Adedoyin Salami, a lecturer at the Pan Atlantic University argued at the meeting, “saw a sharp rise in portfolio inflow of $2.152 billion in April 2014 – an increase of almost US$1.2 billion over the inflow the previous month.
Given the significance of international developments to our economy, he continued, “the announcement of further tapering in Quantitative Easing by the Federal Open Markets Committee (FOMC) of the US Federal Reserve was perhaps the most significant non-domestic issue to reflect on. With FOMC Asset purchases further reduced by US$10 billion/month from May, coupled with easing short and long term yields in the US the impact on Capital flows continues to be an issue of importance for domestic policy making.
Only time, and whatever happens between now and third week in July when the next meeting is scheduled to hold, will tell whether such decisions at the May meeting would be retained as or the rates are further tightened. Within the period also, it is expected that the new CBN Governor would have started settling down in his office, just as analysts and indeed the market would be keen on looking out to his body language for direction.
The only inkling of what to expect from his leadership of the apex bank for now is his promise that while reviewing decision many want him to take a second look at, he “will be fair… we will be just, and I say we would be firm in taking those decisions that needs to be taken.”