CBN Expresses Concern over External Reserves Depletion

The Monetary Policy Committee of the Central Bank of Nigeria (CBN), yesterday expressed concern over the drop in fiscal buffers stating that the development had exposed the economy to vulnerabilities arising from both domestic and external shocks.

The committee at the end of the meeting at the apex bank headquarters in Abuja noted that the erosion had accentuated the regime of persistently high interest rates as well as elevated demand for foreign exchange.

Addressing journalists shortly after the two-day meeting which was held at the apex bank headquarters in Abuja, Dr. Sarah Alade, acting governor, CBN, explained following the depletion, the committee had mandated the management of the bank to continue to monitor developments in the fiscal space with a view to taking appropriate monetary policy actions.

She put the country’s gross external reserves as at May 15, 2014 at $38.30bn compared to $37.40bn at end-March and $42.85bn at end-December 2013.

She, however, added that despite the depletion, the current level of the country’s external reserves could provide approximately nine months of imports cover.

She warned that from the external environment, the prospects for increased yields and interest rates in the United States and the low level of economic activity in the emerging markets could have repercussions for foreign exchange inflows and stability of the naira exchange rate.

On the domestic front, the acting governor listed the high banking system liquidity, elevated security concerns, and anticipated high election-related spending in the run-up to the 2015 general elections as some of the key risks to the domestic economy.

For instance, she pointed out that the current high domestic liquidity could exert sustained pressure on both the exchange rate and consumer prices, as well as accentuate the already high demand for foreign exchange.

These, according to her could further deplete the country’s external reserves.

In addition, she said that core inflation had continued to send conflicting signals since January 2014 noting that if the upward trend continues as observed in April 2014, it could be a major factor in the upward trend in prices.

The Acting Governor said, “The committee noted with satisfaction Nigeria’s overall domestic economic environment which has remained stable with inflation contained within the target range, the recent stability in the foreign exchange market, stable interbank rates and strong growth outlook.

“The key challenge for policy, in the Committee’s view, was that of sustaining and deepening the outcomes of existing policies.

“It noted, also, that over the medium term, the major risks to price stability appeared to be emanating from both external and internal sources.

“The Committee also expressed concern over the eroded fiscal buffers which have exposed the economy to vulnerabilities arising from both domestic and external shocks.

“The erosion has accentuated the regime of persistently high interest rates, elevated demand for foreign exchange and declining reserves accretion.

“The Committee enjoined the Management of the Bank to continue to monitor developments in the fiscal space with a view to taking appropriate monetary policy actions.”

On monetary policy direction for the next two months, the acting governor said the the committee unanimously voted to retain the current stance of monetary policy.