CBN rules out naira devaluation, as foreign reserves falls by $266m in 14days

The Central Bank of Nigeria (CBN) has ruled out a the possibility of devaluation of the naira

in the first half of 2014, saying that doing so, will make  imports costlier.

This is even as the nation’s foreign reserves which stood at N43,505,064,558 as at January 2, has fallen by $266,456,235  to  $43,238,608,322.9 as at January 23, 2014 data from the bank has shown.

A growing Number of economists are in agreement that ordinarily, a devaluation of the exchange rate is supposed to make exports more competitive and appear cheaper to foreigners, thereby  increasing demand for Nigerian goods, but Nigeria being an import dependent country have little or nothing to export except oil.

The reality therefore is that  the country may not benefit from devaluation because a fall in the value of the exchange rate with a substantial current account deficit will only leave the volume of imports steady partly because contracts for imported goods will have been signed. The depreciation also raises the sterling price of imports causing total spending on imports to rise.

An economists and head of research, emerging markets at the Standard Bank London, Samir Gadio agreed with the apex bank that a potential devaluation would have negative consequences on the economy and inflation, which he says is expected to remain in single digits till half year 2014.

“This would indeed lead to a pick-up in imported inflation and depress investment, even though Nigeria’s external competitiveness would most likely not improve since oil accounts for 95 per cent of total exports and given persistent infrastructure bottlenecks.

Speaking on the naira, through an emailed note to the Nigerian Tribune Gadio said:

“While the Bureau De Change segment of the Foreign Exchange market is less relevant in terms of size compared to the Retail Dutch Auction System (RDAS) and interbank markets, the CBN expressed concerns about the widening gap between the parallel and official and interbank USD/NGN rates in recent weeks.”

The Monetary Policy Committee had expressed concern at its meeting held on 20/21 that inflation is likely to occur if CBN devalues the naira because imports would be more expensive causing cost push inflation. Also, export demand will be inelastic in response to the exchange rate change, in the short term, thus making the earnings from exports to be insufficient to compensate for higher spending on imports. The current account deficit may worsen for some months.

Sanusi last week said he has “no fears” of tightening monetary policy further to keep inflation down and to stabilize the currency. The bank can increase its key interest rate from 12 percent and the cash reserve requirement on public sector funds to 100 percent if needed, he said.

“I don’t think we are at the end of possible tightening cycles, but I do think that the scope for further tightening is getting narrower and narrower,” he said. “We do need to rely more on other instruments.

"My strong view is that a stable currency is absolutely critical for price stability and financial stability in general," Sanusi said last week.

The increasing pressure on the naira has forced the Central Bank of Nigeria to defend the currency with $1.45bn within the first two weeks of this year, latest statistics by the bank has shown.

According to the data, the central bank offered $1.45billion in four regulated actions through the Retail Dutch Auction System, which was introduced October last year.

Of this amount, $1.44billion was bought by dealers at the Foreign Exchange Dutch Auction System.

The auctions were held on January 6, 8 13 and 15 respectively, with the central bank offering $350million, $400million, $350million and $350million respectively.