Dropping reserves: CBN ousts importation of generators, Others

Central-Bank-of-Nigeria-CBN07 November 2014, Lagos – DETERMINED to stem the continued decline in the nation’s external reserves, the Central Bank of Nigeria, CBN, yesterday excluded importation of generators and some items from purchase of foreign exchange from the official foreign exchange market.

Meanwhile, the naira suffered its biggest daily depreciation in the interbank market yesterday, losing 285 kobo to the dollar.

Recall that the CBN Governor, Mr. Godwin Emefiele had two weeks ago promised that the CBN would soon introduce measures to protect the economy and the Naira from declining crude oil prices.

He said, “I am aware that price of crude oil is dropping and that presents some form of vulnerability to Nigeria. I can assure you that fiscal authorities and monetary authorities are taking actions to ensure that we take steps that will help Nigeria withstand the shocks that we see. A number of actions will be unveiled, in fact some have already been unveiled, and more will be unveiled by both the monetary and fiscal authorities to ensure that Nigeria continues to remain strong, healthy to be able to support growth and development in Nigeria.”

The following week, the CBN moved to protect banks from possible naira depreciation, by imposing restrictions on the amount of foreign loans they can borrow.

The CBN limited foreign currency borrowing of banks to 75 percent of the shareholders’ funds. Thereafter, the CBN banned banks from selling intervention foreign exchange in the interbank or to bureaux de change (BDCs).

Specifically, the CBN excluded importation of electronics, finished products, information technology, generators, telecommunication equipment and invisible transactions.

The implication is that importation of these items would not be funded with foreign exchange purchased from the bi-weekly Retail Dutch Auction System (RDAS) sessions conducted by the CBN.

This development was contained in a circular signed by the Director of Trade and Exchange Department, CBN, Mr. O.I Gbadamosi. The circular was titled, “Exclusion of some transactions from the RDAS window.

The circular stated, “This is to inform all authorised dealers and the general public that in order to maintain the existing stability in the foreign exchange market and to further strengthen the various policy measures already initiated by the Central Bank of Nigeria, the importation of the following items shall henceforth be funded from the interbank foreign exchange market only: Electronics, finished products, information technology, generators, telecommunication equipment and invisible transactions.”

With this, the CBN has transferred a huge portion of the demand for foreign exchange from the official market to the interbank, with the consequence of further depreciation of the naira in the interbank market.

Reflecting the impact of the development on the interbank market, the interbank exchange rate yesterday rose sharply to N170.2 to the dollar from N167.35 on Wednesday. This translated to N2.85 depreciation of the naira to the dollar. Consequently the naira has depreciated by N3.55 this week, translating to the biggest weekly loss for the local currency.

External reserves continue to fall:
The decision of the apex bank followed the continued decline of the nation’s external reserves owing to increased foreign exchange sales by the CBN in a bid to defend the naira. The decline in external reserves worsened this week, falling by $603 million to $38.16 billion from $38.76 billion at the end of October. Cumulatively, the external reserve has fallen by $5.77 billion in 2014.

Already, as part of measures to reduce the rate of decline of the external reserves, the CBN reduced foreign exchange sales through RDAS sessions this week. Total foreign exchange sold fell by 11 percent to $799.53 million from $898.85 million last week. Consequently, the CBN has sold $29.9 billion through RDAS this year. This translates to 16 percent increase when compared with the $25.67 billion sold in 2013.

However, the decline in external reserve and the depreciation of the naira was triggered by increased foreign exchange demand driven by apprehension among foreign investors over the impact of falling crude oil prices on the nation’s economy, especially the external reserve, the uncertainty surrounding the 2015 and the insurgency in the north east and the possibility of massive depreciation of the naira.

Investors lose N1trn in four days on NSE:
In another development, investors have lost N1 trillion on the Nigeria Stock Exchange, NSE, between Monday and yesterday, as prices of shares continued free fall yesterday, in response to massive divestment of foreign investors from the stock market.

Market capitalisation, which represents to total value of shares on the NSE, dropped by N1.01 trillion from N12.436 trillion at the close of market last week Friday to N11.42 trillion at the close of market yesterday, representing 8.1 percent decline.

The NSE All Share Index and the market capitalisation both fell by 4.1% as the share of 49 companies recorded price decline, with only five companies shares appreciating in yesterday’s trading.
*Babajide Komolafe & Peter Egwuatu – Vanguard

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