Naira may depreciate as CBN halts forex reserves spending

The naira may be truly subjected to the influences of the market as Sanusi Lamido Sanusi, governor, Central Bank of Nigeria (CBN), plans to stop spending from the foreign reserves to support the nation's currency from weakening. This measure is coming on the heels of last week's report that the nation's foreign exchange reserves have reduced by 15 percent to $34.57 billion as at October 5 this year, from the $40.75 billion it stood at the same time a year earlier.

But experts, who spoke with BusinessDay on telephone, believed the current value of the reserves does not give cause for alarm. Bismarck Rewane, managing director, Financial Derivatives Limited, said the only worry was the trend at which the foreign reserves were falling. Though the level of foreign reserves is still okay and at the least can still support more than 12 months of importation, Rewane stated that in his latest monthly economic review he expected the pressure on the foreign reserves to continue this October.

Kola Olusegun, a businessman, noted that his concern was that even as the foreign reserves had depleted by 15 percent in the last one year, there was hardly anything to point to as to what the money was spend on. According to Olusegun, there should normally be no cause for concern if the foreign reserves oscillate, so long its dividend were seen and that crude oil prices remained considerably high.

All the same, experts disclose that if that happens: the naira will be left to the forces of demand and supply to determine the value of the naira, a situation that may leave the local currency vulnerable to manipulations. The naira slid to a 13-month low in September amid strong local demand for the US dollar by gasoline and rice importers, although the central bank's support helped to stabilise it, and ended the week just below N151 to the dollar, roughly with its average level over the past year.

But, he revealed, the current exchange rate is not a level that needs to be maintained "at all costs. "My own view is that exchange rates have multiple equilibria, and equilibrium exchange rates will depend on what we see as the long-term sustainability of the reserve positions."

Nevertheless, in the short to medium term, "we do believe we can maintain this range," Sanusi stated, however, saying replenishing the reserve level would depend on a significant degree on the level of spending by the government. "The preservation of reserves is also dependent on a number of complementary government policies," he noted, citing efforts under way to reform the petroleum industry among other factors.