CBN: No Cause for Alarm over Naira

By The Rainbow

In view of the increasing pressure faced by the naira, which recorded its worst year-to-date performance against the United States dollar last Friday, the Central Bank of Nigeria (CBN) has assured Nigerians that there is no cause for alarm over the nation's currency.

CBN Deputy Governor (Operations), Mr. Tunde Lemo, told THISDAY at the weekend that the central bank would continue to defend the naira.

According to data gathered from the Financial Market Dealers Association (FMDA), except at the regulated Wholesale Dutch Auction System (WDAS), where the central bank regulates the price of the naira against the dollar, the domestic currency dipped remarkably across other market segments, compared to its value at the beginning of the year.

For instance, at the interbank market, the naira has so far slumped by N5.15, to N161.82/$1 on Friday, compared to the N156.67/$1 it stood on January 2, 2013.
Also, the FMDA data showed that at the Bureau De Change (BDC) segment, the domestic currency has tumbled by a total of N4, from the N158/$1 it was at the beginning of the year, to N162/$1 on Friday.

At the parallel market points, the local currency now sells for N162.50/$1, representing a decline by N4, as against the N158.50/$1 it was at the beginning of the year.

However, the naira is still at N155.75/$1 at the WDAS.

According to the central bank's exchange rate band, the naira should float roughly within a range of N150 and N160 to a dollar. This unfortunate development is threatening the relative stability recorded by the naira in the past 18 months as well as the accretion of the external reserves. Nigeria's external reserves stood at $48.479 billion as at June 13.
But Lemo said the central bank was monitoring the development in the forex market.

'The CBN is watching. Remember we said the exchange rate (which remains stable, but not fixed) should oscillate within a band, and the market dynamics still confirm same. There is no cause for alarm, as foreign reserves remain robust, covering 11 months of import. We shall continue to have good forex inflow, confirming sustained confidence in the Nigerian economy,' he said.

Responding to enquiries on the likelihood of an impact of profit taking by foreign investors on the Nigerian Stock Exchange (NSE) on the naira, Lemo said: 'That is a one-off. We have to watch the market for some time before we jump into conclusion. There may be a little bit of profit-taking but the gilt and capital market yields are still attractive to foreign investors, especially with Nigeria’s positive economic outlook.

'With the recent release of 32 stocks approved for margin activities by the Securities and Exchange Commission (SEC), we expect positive outcome and additional inflow of foreign capital. This is however subject to the prescribed macro-prudential regulation by the CBN, including a sectoral limit of banks' exposure to the capital market of 10 per cent.'

However, when contacted on the development, London-based Head of Macro-economic and Fixed Income Research at FBN Capital, Mr. Gregory Kronsten, argued that the trend observed at the forex market reflected a shortfall in oil receipts and the exit of some offshore fixed income investors from the country.

According to him, 'The general background is the flight of offshore investors from emerging, and to a lesser extent, frontier markets.

'The CBN believes in a stable exchange rate and operates monetary policy to this end. The exchange rate has a greater impact on inflation than have interest rates, for example.

'The CBN wants to maintain the present system of a symmetrical corridor around a mid-point (currently N155/$1). If the pressure in the markets is too strong, as in fourth quarter 2011, it will accept an adjustment to the rate (i.e moving the mid-point). If the pressure can be contained, either by its efforts or by changing global conditions, it will happily hold the line.'
Renaissance Capital Limited had predicted last week that the naira might fall further as a result of the possibility of an increase in government spending due to the emergency rule declared in Borno, Yobe and Adamawa States.

The research and investment firm also identified recent deterioration of Nigeria's external position due to a drop in crude oil production and the slide in crude oil prices as factors that might hurt the naira this year.