Rate Cut, Naira Appreciation not CBN’s Priority for Now

24 Feb 2013

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Naira notes

Festus Akanbi 
As managers of the nation’s economy bask in the euphoria of a steady accumulation of foreign exchange reserves in recent times, indications emerged at the weekend that the Central Bank of Nigeria (CBN) has sufficient reasons not to lose sleep over the current interest rates and the naira value, which are described as two important factors luring portfolio investments to the country.

Although a section of the organised private sector, especially the real sector, has described the prevailing lending rate as punitive, a report of the international financial advisory firm, Renaissance Capital, a copy of which was made available to THISDAY, said the apex bank was not likely to dissipate energy in bringing down the rate.

It also suggested that the CBN is bound to ensure currency stability, saying any effort to increase the value of the naira in 2013 may be counterproductive.

By last Thursday, the external reserves had hit $46.923 billion.
In the report titled, “Thoughts from a Renaissance man: Nigeria Reforms, Electricity and Local Yields,” analysts said in view of the deluge of foreign portfolio investments into Nigeria and the attendant steady growth of the foreign reserves portfolio, the question is how the central bank might manage the potentially large inflows.

In order to sustain the current stream of foreign investment inflow into Nigeria, Rencap believes the apex bank will not take any decision, which may at the end of the day send a dangerous signal to foreign investors.

The report said, “Our understanding is that the CBN is unlikely to let the currency appreciate. It would prefer to build up FX reserves. It is unlikely to cut interest rates significantly to deter inflows, when GDP growth is running at 7%. In any case, cutting rates can become counterproductive, given the positive impact it has on bond prices, which may then encourage more inflows. There is no intention to restrict capital inflows, as Brazil did when global currency wars began – indeed, it was only relatively recently that Nigeria opened up T-bills to foreign investors. Nor does the central bank fear the inflationary impact of FX inflows.

“Despite a rise in FX reserves (excluding gold) to $42bn by August 2012, from $35bn in 2011, M2 money supply was up just 14% YoY by December, in an economy recording roughly 19% nominal growth (6-7% real, 12% inflation).”

The report explained that the current drive to build the foreign exchange margin is informed by the need to hedge the nation’s economy against probable shocks in the international oil market.

“In our view, the CBN sees a fall in the oil price as the main risk to stability. We believe this is why it is actively building up FX reserves, which were up $12bn at $46.7bn on 14 February, compared to a year
earlier. We think the CBN is not likely to cut rates while it is growing reserves.

“Inflation – which we expect to pick up from 9% in January to an average of 10-11% in 2013 – will be a secondary consideration, in our view. The government missed its $50bn FX reserves target for YE12; we expect this to be reached in mid-2013, when we think the risk the CBN attaches to compromising stability will fall. Depending on the external outlook at that point, rate cuts may follow.

“We expect a 100-bpt cut in the policy rate to 11% by YE13, and for the CBN to be more cautious about lowering the cash reserve requirement (CRR),” the report said.

According to Rencap report, “Sanusi Lamido Sanusi does not think lowering interest rates alone will spur lending. He believes that absent structural reforms, the increase in bank lending will be limited, and that lower rates will not compensate for uncompetitive labour and structural constraints.

The report maintained that fiscal consolidation would help lower rates. “Fiscal consolidation has helped achieve the stability that Sanusi is trying to conserve. The 2013 budget deficit may come in smaller than the 2.2% of GDP target, at 1.8%, according to Finance Minister Ngozi Okonjo-Iweala. The government’s plan to lower domestic borrowing through the redemption of some bonds and to keep foreign borrowing at 2-3% of GDP will help moderate interest rates. Domestic debt accounted for 86% of public debt at YE12 – the policy target is 60%. The building up fiscal surpluses, as Okonjo-Iweala did in the 2004-2006 period – that partly explains the 91-day Treasury bill yield’s drop from 15% to 7% – alongside an increase in FX reserves, would allow for a sustained fall in interest rates. However, we think this is unlikely before this administration’s term ends.”

Since the coming on board of Mallam Sanusi Lamido Sanusi as CBN governor in June 2009, the naira has averaged N154/$, with minimal volatility (in a total range of N146-165/$), and inflation has averaged 12%, but is now 9%. We expect the c/a surplus to have averaged 7% of GDP over 2009-2013, FX reserves to have averaged roughly 10 months of import cover and GDP growth to have averaged 7%.

Sanusi has also advanced institutional changes at the central bank itself to improve transparency, while promoting economic development through support for agriculture and other sectors. Goals this year may include overseeing the Asset Management Corporation of Nigeria (AMCON) divesting banks, and encouraging legislation around an AMCON sinking fund.

Tags: Business, Nigeria, Featured, Naira Appreciation

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