CBN braces for currency speculators


With 2019 elections spending expected to lead to a surge in liquidity and foreign exchange demand, the Central Bank of Nigeria (CBN) is stepping up efforts to curb the activities of currency speculators, who could be tempted to take positions on naira. 



Despite widespread calls for the Central Bank of Nigeria (CBN) to cut interest rates in order to boost economic growth, the apex bank had in the two meetings of its Monetary Policy Committee (MPC) so far held this year, kept its benchmark rate, the Monetary Policy Rate (MPR), unchanged at 14 per cent.

Most of the MPC members have argued that while they recognised the benefits of lower interest rates for the economy, they are concerned that monetary policy easing at this time posed a risk to exchange rate stability.


For instance, in his personal statement at the first meeting of the MPC for this year held last month, Deputy Governor (Corporate Services) at the apex bank, Adamu Lamtek, warned that the exchange rate stability, which the country has enjoyed in recent times could be threatened if measures were not taken to prevent expected huge spending ahead of the 2019 elections, from resulting in a buildup of excess liquidity that could trigger an increase in foreign exchange demand.


Lamtek said: “Such an adverse scenario must be prevented through a proactive monetary policy. This is justified by the reality that exchange rate stability is critical to the current recovery in economic growth and the gradual disinflation. Added to this is that a stable exchange rate should, in the minimum, prevent further deterioration of foreign currency denominated assets of the banking system and improve the resilience of the industry”.


Besides, the CBN Deputy Governor, stated: “Among other challenges, banks have had difficulty with their foreign currency denominated liabilities (loans) as the exchange rate moved against borrowers as from 2015. Therefore, from a financial stability standpoint, any threat to the naira exchange rate stability must be viewed seriously and promptly addressed to forestall another exchange rate shock.”

Similarly, briefing journalists at the end of the MPC’s latest meeting last week, where eight out of nine members at the gathering, voted to retain the MPR and other monetary indices, CBN Governor, Mr. Godwin Emefiele, said in arriving at the decision, the committee considered the forecast of high liquidity injection in the second half of 2018 and upward pressure on prices, driven largely by substantial expansion of fiscal policy.

“This pressure will arise from the late passage of the 2018 budget, outstanding balance from the 2017 budget and the pre-election expenditure. Tightening would ensure the mop up of excess liquidity, accelerate the reduction in the rate of inflation to single digit, boost investor confidence and promote foreign capital flows with complimentary impact on exchange rate stability,” he stated.


Naira under pressure

Indeed, the banking watchdog’s caution may be justified because even though electioneering campaigns for the 2019 elections have not fully taken off, the naira has started coming under pressure both in the Investors’ and Exporters’ (I&E) forex window and in the parallel market.

Specifically, a fortnight ago, traders said the naira eased to N362 to the dollar on the I&E Fx window from N360/$1, at which it had traded for over six months, as funds repatriated dividends abroad following the end of the earnings season.

Forex dealers said the local currency started to weaken as demand piled up especially from companies seeking to repatriate dividends and investors booking profits from local assets.

Last week, traders also predicted that the naira was going to come under pressure in the coming days as portfolio investors continue to exit local treasuries due to lower yields.

Treasury bill yields have fallen to around 12 per cent from as high as 18 per cent a year ago after the Federal Government repaid maturing bills rather than roll them over as it has done in the past.

Analysts point out that the outflow by investors has also been worsened by interest rate rises in the United States.

In addition, the naira has also weakened in the parallel market in the last few weeks from N363 per dollar to N366/$1 due to a surge in demand for the greenback from importers buying goods from abroad.


CBN unmoved

However, in a chat with New Telegraph, the Acting Director of Corporate Communications Department (CCD) at the CBN, Isaac Okorafor, said the regulator was not bothered about the naira’s recent weakening as the country had adequate foreign exchange reserves to support the local currency.

He said: “You will always have currency speculators, but the important thing is that the CBN has enough foreign exchange reserves to meet forex demands. Our foreign reserves stand at over $47billion and the CBN will continue to intervene in the interbank forex market to ensure sustained liquidity and stability in the market.”


$1.07bn in interbank fx market

In fact, data obtained by this newspaper shows that between May 8 and May 27, 2018, the CBN injected a total of $1.07billion into the interbank forex market to boost liquidity in the system.

For instance, on May 4, the apex bank intervened in the Secondary Market Intervention Sales (SMIS) to the tune of $349.34 million. On May 8, it pumped in $210 million into the inter-bank foreign exchange market. A breakdown of the amount shows that it offered the sum of $100 million to authorised dealers in the wholesale segment of the market; the small and medium scale enterprises (SMEs) segment received the sum of $55 million while the sum of $55 million was apportioned to invisibles such as tuition fees, medical payments and Basic Travel Allowance (BTA).

Furthermore, on May 15, the bank injected another sum of $210 million into the market. Of this amount, $100 million was allocated to dealers in the wholesale sector, while the small and medium enterprises (SMEs) segment and invisibles each received the sum of $55 million. Last week, the CBN intervened in the market with a total of $310 million.


Adequate FX supply for travelers, pilgrims