Nigeria Content Online

Financial
Derivative Company, a finance and research firm, in its bi-monthly
economic and business update, says the upward adjustment in interest
rates have helped to reduce pressure on the nation’s reserves.

“The
nation’s external reserves declined for the 12 consecutive months in
November to $33.1billion from $43billion a year ago, representing 23
percent depletion. Year to date, reserves have dwindled by 21 percent
from $42.1bn. However, the rate of depletion has slowed, thanks to
upward adjustments in interest rates that indirectly helped to reduce
the pressure on the reserves”.

The
report stated that the rate of decline started to slow down in
September when the Central Bank of Nigeria increased the benchmark
interest rate from 6 percent to 6.25 percent.

“On
a month-on-month basis, reserves declined by 1.3 percent in November,
compared to 3 percent and 5 percent decline in October and September
respectively.”

This is in spite of high oil price prices (averaging $87pb) and high oil production (above 2.1mbpd) in November.

“Also, forex demand and CBN intervention in the forex market dropped significantly during the period,” the report stated.

According
to the firm, the Central Bank, which had earlier stated that, “the
continued dependence of the country on imported food and energy is one
of the main sources of erosion of our foreign re-serves”, should move
fast to rescue what is left of the reserves.

Way out

According
to the report, high interest rates will encourage capital inflow which
will further reduce forex and reserve pressures.

“If
an increase in interest rate can have the effect of slowing the pace of
depletion, it could also be supportive of accretion and increase the
propensity to save, as most economic agents would prefer to delay
consumption and earn interest on their income, as long as the interest
rate is higher than the rate of inflation”.

Nigeria’s
foreign exchange reserves fell by almost a quarter to just under $33
billion by December 2 from $43 billion a year ago, the Central Bank
said on Monday. The figure was also around 4 percent down on the $34.3
billion recorded in mid-November. Increased government spending in the
nation’s economy has put pressure on reserves.

Dollar
demand at the bi-weekly forex auction has also forced the Central Bank
to dip into the reserves to defend the local currency for months.
According to the report, compared to last month’s trading values, the
naira has depreciated marginally against the US dollar by 30K to
N148.6/$ at the official market. At the inter-bank market, it
depreciated by 43k to trade at N150.71/$. The naira, however,
appreciated marginally in the parallel market by 50k to sell at N153/$.

Samir
Gadio, emerging markets strategist, Standard Bank, said the growth
money supply continued to decline to 13.2 percent year-on-year in
October, from 18.7 percent year-on-year in September and 21.6 percent
year on year in August, reflecting a sharp contraction in net foreign
assets and sizeable deceleration in Net Domestic Credit growth in
annual terms. “Broad money was broadly flat in October, at
N11.2trillion ($74.7billon), down from N11.5trillion ($76.7billion) in
August.

Net foreign assets shrank 13.9 percent year-on-year in October, from
negative figures of 7.5 percent year-on-year in September and 13.1
percent year-on-year in August. This probably primarily mirrors the
downward trend in the Central Bank’s foreign reserves,” he said.