So far this year, the Central Bank of Nigeria (CBN) has supplied over $27.34 billion (N4.24 trillion) at the official window to meet increasing demand for foreign exchange.
This figure does not include foreign exchange inflow from autonomous sources such as multinational oil firms at the interbank. This is compared to $23.76 billion (3.7 trillion) supplied at the official window last year. The naira, which opened the year at N149.17, is currently heading towards N160 mark.
When the CBN announced devaluation of the naira last week, the currency lost N1.71, close to a decade high to close at N156.21. This is the highest weekly depreciation in a long time. Though the CBN move was not implicit, the shifting of the band from between N150 and N154.50 to between N155 to N160 was enough indication that the regulator was relaxing on its decision to defend the naira at the old band.
At the interbank, the window where banks could trade foreign exchange among themselves, the naira did not fare any better, closing at N159.75, cushioned, of course by the multinational oil firms who also supply dollars to meet their demand for the local currency.
The naira has come under intense pressure in the last few months with the CBN struggling to meet growing demand for the greenback. In the month of August alone, foreign exchange sales by the CBN to the authorised dealers amounted to $3.68 billion, showing an increase of 11.6 and 53.2 per cent over the level in the preceding month and the corresponding period of 2010, respectively.
Quite understandably, the CBN has been fixated on achieving a stable foreign exchange market, given that Nigeria is an import dependent economy. According to CBN governor, Lamido Sanusi: “The impact of external developments on the domestic economy working through the channels of trade, finance and confidence has been strong and would need to be addressed efficiently and expeditiously.”
In line with its core mandate, while the apex bank can boast of modest achievement in taming inflation, it has not been so successful in terms of the exchange rate and interest rate. Though year-on-year (YoY) headline and food Inflation rates inched up marginally from 10.3 per cent to 10.5 per cent and 9.5 per cent to 9.7 per cent in September and October respectively, month-on-month the rates actually declined by 0.92 per cent and 0.7 per cent respectively during the same period.
Not so for the other rates. The benchmark interest rate, which opened the year at 6.5 per cent, is currently 12 per cent after tinkering with it several times during the year in reaction to fiscal stimuli, while the exchange rate which opened the year at N149.50 has declined by 3.7 per cent.
Nigeria’s import dependence, as well as fiscal indiscipline has made it difficult for the central bank to keep tab on these rates. According to Omolara Akanji, former CBN director trade and exchange department, there was need to open up the economy and make it more productive. “If an economy is a consuming economy, interest and exchange rates will always affect it. But if it is a producing economy, it will affect it positively, more so if the currency is tradeable.”
Given the rising dollar demand at the official window in the last few weeks, it is obvious that the naira may ease more in the days ahead unless the regulator takes further measures to tighten liquidity. According to CBN deputy governor, Suleiman Barau, adjusting the official exchange rate has done little to shore up the naira. “Continued demand pressure for foreign exchange due to the fact that the system is still very liquid which could support sustained speculative demand. There is the obvious need to embark on further liquidity mop up that is consistent with our tightening stance and on further administrative measures,” he stated in his personal notes at the end of the monetary policy committee meeting last week.
He said the removal of fuel subsidy, with its inflationary impact needed to be considered in addition to increased fiscal and consumer spending that usually comes with the year end festivities which would also put pressure on inflation. “This is a source for concern as such a development may erode whatever gains we have made in containing inflationary pressures,” he said