The Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele has said he will continue to defend the naira after the currency plunged to a record low.
“There’s no need for anybody to panic or worry,” Emefiele told Bloomberg.
“The central bank has always intervened. We know our reserves can support nine months of imports, which is far above the minimum expected. We believe we’re very safe.”
The naira weakened to an all-time low on November 7 after a drop in crude prices, prompting the central bank to intervene. In defending the currency rate, Africa’s largest oil producer has reduced its foreign reserves to a four-month low of $37.8 billion.
The naira weakened a third day, down 0.8 per cent to N169.80 per dollar last week.
Recently the regulator restricted banks’ use of the standing deposit facility, which allows companies to earn interest on excess cash, in an attempt to encourage lending to local businesses. Emefiele said the move didn’t weaken the naira because banks used their surplus liquidity to buy short-term central bank bonds.
“After that decision, most of them moved their money to the open market operations window,” he said. “We took all that money.”
The central bank has been selling dollars to banks outside its twice-weekly auctions since the naira’s drop on the morning of November 7, CBN Deputy Governor, Sarah Alade said.
“We have been intervening in the market since,” she said.
Volatility boosted the chance of a 50 basis point increase in Nigeria’s benchmark interest rate, which has been at a record high of 12 per cent since October 2011, London- based Capital Economics Limited had said.
The central bank’s next Monetary Policy Committee meeting is on November 24 and 25.
The sharpest drop in oil prices since 2008, in addition to a surge in the dollar, are testing the resolve of energy-producing nations like Nigeria to defend their currency pegs.
Even Saudi Arabia, whose $745 billion reserves may allow it to maintain the link for years, is feeling the pressure of speculators betting against its currency. Nigeria intervened in foreign-exchange markets to bring the naira back from a record low recently, while economists surveyed by Bloomberg expect Venezuela to capitulate on its dollar peg by year-end.
For the dwindling number of nations whose exchange rates are linked to either dollars or a basket of major currencies, breaking those ties would raise the odds of inflation accelerating too fast. It would also take away a steadying influence on their economies.
“Countries operating with a currency peg, particularly oil exporters, are suffering from losing export earnings, weakening their ability to defend the peg at a time when emerging-market currencies are under pressure from a stronger dollar,” the chief economist at London-based frontier- markets specialist Exotix Limited, Stuart Culverhouse said.
“It magnifies the problems they’re having.”
Oil and natural gas account for at least 85 percent of the exports of Saudi Arabia, Nigeria and Venezuela, while Russian energy sales account for more than half the government’s revenue, according to the United State Energy Information Administration.
Though it didn’t have a formal peg, Russia, the world’s largest energy exporter, last week ended a policy of maintaining the ruble in a fixed band versus a basket of dollars and euros.
Crude oil fell almost 30 per cent since mid-June to a three- year low of $75.84 per barrel recently, according to generic prices in New York.
At the same time, the dollar is soaring on the prospect of higher US interest rates. Bloomberg’s Dollar Spot Index, which tracks the greenback against 10 major peers, rose nine per cent since June.
Nigeria may need to devalue the naira after presidential elections in February, Goldman Sachs Group Incorporated had said in a report.
Policy makers target a rate for the naira at twice- weekly auctions of N155 per dollar, plus or minus three per cent.
In defending the fixed-exchange rate, Africa’s largest oil producer has reduced its foreign-currency reserves to a four- month low of $38 billion. Those concerns led Phillip Blackwood, a money manager at EM Quest Capital LLP in London, to sell his holdings of Nigerian domestic bonds in recent weeks.
“There’s so much pressure,” Blackwood, who manages $3.3 billion of emerging-market assets.
“They’re not willing to defend. It costs too much.”
Spokesman for the Central Bank of Nigeria, Ibrahim Mu’azu said no decision has been taken on whether to devalue.