This year, the Governor of the Central Bank of Nigeria, Mr Godwin Emefiele has taken it upon himself to staunchly defend the naira. Since the fall in global oil prices last year the Central Bank of Nigeria (CBN) has devalued the naira twice and maintained contractionary monetary policy as it sought to defend its value and maintain price stability. The devaluation was done to preserve the foreign reserves it was using to supplement importation as low crude oil prices drastically reduced revenue accruable to the Federal Government of Nigeria.
Nigeria, being a net importing country, forced the CBN to support importation in order to prevent shortages in the economy. Such an eventuality would lead to uncontrolled inflation as the scarcity of necessary goods and services would drive prices up. For some, this would mean paying more for their usual rice, beans and stew at the local canteen due to the increased price of tomatoes. For those with more expensive tastes, imagine paying north of ₦3000 for your shawarma because the ingredients are more expensive.
In February, low oil prices and excessive demand for U.S Dollars forced a devaluation from ₦167/USD to the current official peg of ₦197/USD. At the Monetary Policy Committee (MPC) meeting in July the CBN decided to maintain contractionary monetary policy by holding the benchmark Monetary Policy Rate (MPR) stable at 13% in light of global economic volatility and uncertainty surrounding the economic policy plans of the new administration. A Cash Reserve Requirement (CRR) of 31%, the highest in Africa, has also been maintained to keep naira scarce in the FX market.
The Battle Against Further Devaluation
The fall in global oil prices precipitated a dip in foreign reserves as the CBN fought to maintain the naira exchange rate and supplement importation. However, following the CBN's decision to devalue in November and again in December and February 2015, it had to spend even more out of the foreign reserves account to defend the naira.
The CBN has established a slew of policies aimed at reducing demand for Dollars and maintaining a reasonable exchange rate for the naira so that local participants are not priced out of the FX market.
As both domestic and foreign investors called for a further devaluation, the CBN opted for alternative methods of defending the currency. The RDAS auction market was closed earlier this year to reduce speculation in the naira and the CBN warned that people found making transactions in foreign currencies would face fines and prison time. Importers of a list of 41 items were banned from accessing US dollars from the interbank market for their imports. This was done to preserve the foreign reserves and encourage local production of imported goods. The ban had a negative effect on the value of the naira as the demand for US dollars in the ‘black market’ increased, pushing the unofficial exchange rate as high as ₦245/USD at one point.
On the other hand, this monetary policy tool helped increase foreign reserves from $29 billion at the end of June to $31.429 billion at the end of August. Foreign reserves fell by 9.26% through the first 7 months of the year as the CBN was forced to deplete the account by selling down the reserves to increase the supply of dollars and bridge the gap between demand and supply, which was putting downward pressure on the naira.
On the last day of July, the naira appreciated to ₦225/USD because an oversupply of U.S dollars in bank vaults led them to refuse dollar deposits into domiciliary accounts. This caused an increase in the supply of dollars which forced the exchange rate down. The CBN also established a rule requiring banks to pay for U.S. dollar purchases 48 hours in advance in a move to curb dollar demand, speculation in the naira and reduce unlawful financial flows. These policies have helped stabilise the value of the naira which stayed in the ₦208 - ₦215/USD band throughout August. Frantic parents sending money to children and schools abroad could breath a little easier.
Increasing Domestic Refining Capacity
The naira may be headed for a further appreciation as the Nigerian National Petroleum Corporation recently announced that repairs had been concluded on the Warri and Port-Harcourt refineries. Both refineries are functional and the Port-Harcourt refinery is currently producing 60% of its 210,000 barrels per day capacity while the Warri refinery is expected to reach 80% of its 125,000 barrels per day capacity.
The ability of these refineries to produce refined petroleum products should reduce the need to import such products. Petrol importation is responsible for 35% of the demand for US dollars and a reduction in the importation of fuel should reduce the demand for dollars and result in a sharp appreciation of the naira.
All indications point towards the CBN maintaining its monetary policy stance aimed at creating a stable exchange rate while simultaneously catering to domestic industries and moving Nigeria towards becoming a net exporter. When the Federal Government reveals its economic policy plans, we should expect an alignment between its policies and that of the CBN such that both institutions will work in synergy towards the economic growth of the country.