Why forex reserves keep rising despite $1.645bn CBN interventions

DESPITE defending the Naira with huge foreign exchange resource deployment by the Central Bank of Nigeria (CBN) in the Nigerian currency market, the external reserves reached a 17-month high on Friday  at US$30.1 billion, indicating a new threshold in the external sector strategy.

The positive performances of the reserves have been attributed to a combination of deft strategies by the CBN and the fortune of oil price and output rebound in the fourth quarter of 2016. These ensured a reversal of the decline with a sustained accretion and build up since then leading to latest figures which was the level as at November 26, 2015.

This means that Nigeria’s dollar reserves have increased by 15.02 percent since the start of the year, data showed, but were still far off their peak of $64 billion hit in August 2008.

Available records from the apex bank show that in the midst of all these, the apex bank has intervened in the forex market six times as follows: Tuesday February 21st, $417 million; Thursday February 23rd, $231 million; Monday February 27th, $180 million; Friday March 3, $350 million, Monday March 6, $367 million; and on Tuesday with $100 million, totaling US$1.645 billion.

The CBN has been in a battle to save the local currency from speculative attacks since 2015, at the backdrop of worsened foreign exchange inflow orchestrated by the sharp drop in the oil prices, Nigeria’s major foreign exchange earner.

Consequently, the external reserves began a steady depletion trend from US$31.8 billion mid-2015, hitting the lowest point of US$23.9 billion on the 19th October 2016.

The key strategy of Godwin Emefiele’s CBN in the face of the twin problem of speculative attacks and decline in oil earnings, was foreign reserve preservation within the acceptable import cover benchmark of about USD23 billion, which the apex bank achieved substantially.

Consequently, the forex policy strategy was elevated two weeks ago, to counter-speculation and grip on parallel market rate.

The policy appeared to be recording success, forcing parallel market rates to reverse from N520/ USD1 to about N455/ USD1 within two weeks of launch.

Hopes of further appreciation have remained high with the latest development in the external reserve.

Part of the measures Emefiele’s CBN has adopted involved absorbing a key segment of the market, the Bureau de Changes (BDCs) into its scheme, thereby earning their confidence and support.

This week, CBN supplied $25 million to the BDCs prompting the parallel market exchange rate to reverse to N455, a N10 gain.

This development was in sharp contrast to the N17 depreciation suffered by the naira on Monday against the dollar due to upsurge in demand by importers travelling to China.

President of BDCs association, Aminu Gwadabe, expressed optimism that the Naira will further appreciate in the coming week, based on expectation of increased dollar supply.

Commending the move, market analysts observe that it will further create problems for currency speculators who are yet to recover from the sudden appreciation of the Naira.

The analysts believe if this development is sustained the apex bank would also achieve its core-mandate of price and exchange rate stability.

It will be recalled that the CBN, in February 2017, changed its forex rule to guarantee supply to both small and the big end-users. The policy has restored stability and bolstered market confidence which has ultimately boosted the value of the Naira.