In response to the International Monetary Fund, IMF, propositions on judicious use of the nation’s external reserves to build buffers against the shock of rising interest rates in the monetary policy normalisation regime of the United States, the Central Bank of Nigeria, CBN, has insisted that it will maintain exchange rate stability than building the buffers.
Nigeria’s external reserves has declined by $4.2 billion since July 5th, 2018 due to increased dollar sales by the CBN to forestall naira depreciation due to increased dollar demand from foreign portfolio investors exiting the country’s financial markets in response to the rising interest rate in the U.S.A. and other advanced economies.
Mr. Godwin Emefiele, CBN Governor, defence of the CBN’s policy preference at a joint press briefing of the Nigerian delegation to the World Bank/IMF 2018 meeting which ended on Sunday, October 14, 2018, in Bali, Indonesia, revealed that maintaining exchange rate stability is more important than building the buffers which may result in currency depreciation in Nigeria thereby weakening country’s assets, raising non-performing loans, and other wide implications.
Emefiele said, “We are trying to see to it that we maintain a stable exchange rate and avoid the pitfall of depreciating our currency so soon in the early days of the normalisation.
“We are going to build buffers but unfortunately I must say that we are in a period where it is difficult to talk about building reserve.
“You can only build reserve buffers if you want to hold on the reserve, while allowing your currency to go and wherever it goes can be something else.
“It is a choice we have to make and at this time, the choice for Nigeria is to maintain a stable exchange rate so that businesses can plan and we don’t create problem in the banking system assets.
“Naturally, when this happens, it results in weakening of assets, raising non-performing loans, and other wide implications. This is why we will maintain the posture we have and we believe that it is sustainable in the short run.”
He said: “Indeed, because of the monetary policy normalisation, some concerns were raised that the adverse consequences of the policy will eventually spread to Europe and could create more problems for emerging market economies.
“For emerging market economies, it was observed that the adverse consequences of the US policy normalisation have resulted in capital flow reversals, particularly for emerging markets, resulting in some cases, currency depreciation in those economies.
“In general, advice was given that countries must continue to build buffers and that different countries should implement country-specific policies to protect against this shocks that is expected to take some time and its impacts.
“At this time that we have started to see reversals in monetary policy, where interest rates are rising and naturally those flows (capital) are beginning to return back to where they came from. Practically all emerging markets have suffered, not just by depreciation, but also lost reserves. For Nigeria, we have lost only reserves by a margin in my view and at the same time, we have managed to sustain stability in our foreign exchange market.
‘’I think we have done a very good job, not only trying to maintain a stable exchange rate, but trying to avoid depreciating our currency so far in this early days of normalisation. We have lost reserve yes, somewhat marginally in my view, and at the same time, we have managed to sustain stability in our foreign exchange market.”
The CBN Governor further boosted that the country’s apex bank has performed relatively better than other emerging markets in the area of both exchange rate stability and reserves in the wake of the normalisation policy of the U.S.A.
Recall that on Wednesday Ms. Anna Ilyina, IMF Head, Emerging Economies Regional Studies Division, European Department, in a session at the just concluded International Monetary Bank / World Bank Annual Meetings in Indonesia, charged emerging economies including Nigeria, to build their external reserves as buffers against the normalisation policies which she said might be protracted.
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