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Efforts by the
Central Bank of Nigeria (CBN) to block all loopholes for currency
speculation may be paying off as demand for foreign exchange has
declined in the last few weeks.

From $300 million
to $350 million average demand per auction for much of last year, the
claims now hover around N200 million to N250 million. As a result, the
CBN is able to significantly meet genuine dollar demand.

For instance, the
financial regulator sold a total of $874.04 during the fortnight up to
February 4, representing 93.5 per cent of the $935.15 demanded.

The naira was
relatively stable at the official market but shed weight in the
interbank market, closing at N150.34 and N154.45 respectively during
the period.

The foreign
reserves have risen as a result, after significant depletion for much
of last year as the CBN struggled to meet demand and defend the value
of the naira. The reserves closed on Tuesday at $34.296 billion, from
$33.124 billion at the end of January. The figure was $34.621 billion
last Thursday, the highest level since October 15.

Structural problem

The Central Bank,
in a recent communiqué signed by CBN governor, Lamido Sanusi, at the
end of the 74 Monetary Policy Committee meeting held in January, said
that the fundamental structural problem of the country as an
import-dependent economy was largely responsible for the continuing
depletion of the external reserves, and raised concerns about its
effect on inflation.

Razia Khan,
Regional Head of Research, Africa Global Research at Standard Chartered
Bank, London, said the foreign exchange rate is likely to remain a key
determinant of Nigeria’s inflation profile.

“And how much more
tightening we see from the CBN will depend on how much is needed to
stabilise demand for foreign exchange, as well as the pace of private
sector credit growth in the coming months,” Ms. Khan said.

However, there are
reservations about how long naira stability can be sustained. According
to Samuel Nzekwe, former president of the Association of National
Accountants of Nigeria (ANAN), it is too early in the year to determine
how long the stability will last.

“In real terms,
there is inflation. If people don’t demand foreign exchange, it means
more goods and services are not produced. There is scarcity of funds,
that is why people are not demanding. If the real sectors are into
production, more people will demand for foreign exchange,” Mr. Nzekwe
said.

Attractive deposit rates

He faulted the CBN for not doing enough to encourage banks to pay attractive rates for deposits and lend to critical sectors.

“You are paying two
per cent for deposits and lending rate is about 18 per cent, and banks
depend on deposits to lend to deficit units of the economy,” he further
said.

The CBN is also worried about this, bemoaning the lack of incentive to save, which is causing distortion in the economy.

“The MPC also noted
with serious concern the existing low rates of about 1.0 percent paid
on savings deposits and its implications for financial intermediation
and the mobilisation of long-term funds, which is critical for
enhancing investment in real sector economic activities, and hence,
economic growth.

“The Committee felt that in preparation for the removal of the CBN
guarantee of inter-bank market, banks need to provide reasonable
incentives for the mobilization of savings for growth and financial
inclusion,” Mr. Sanusi stated.