Up to N568 billion may have been withdrawn from the financial system by the Central Bank of Nigeria (CBN) to boost cash reserves banks have to keep to meet new requirement on private sector deposits.
Following the hike by 500 basis-points on cash reserve requirement (CRR) on private sector deposits on Tuesday, November 25, the CBN moved to drain cash from the banking system, which triggered a scramble for funds in the interbank lending market.
The cost of borrowing among banks almost doubled the following day.
The naira traded at N178.85 to the dollar shortly after the market opened, but rebounded by around 1 per cent to close at N176.35 after two oil companies sold dollars.
But dealers said it is still below the new target band of 5 per cent either side of N168 to the dollar announced by the CBN.
Total Oil sold $20 million and Shell an undisclosed amount, boosting dollar liquidity in the interbank market; and there are expectations that the CBN will intervene to keep the naira within the band.
Analysts at South Africa-based NKC Research said failing to devalue the naira would have been much worse. “The bold steps taken by the central bank will help tremendously to stem the drawdown in foreign exchange reserves.
“Given the sharp depreciation of the interbank exchange rate in recent months … the cost of imports would have increased even in the absence of an official devaluation.”
Investors have pulled huge sums out of many emerging economies since the United States Federal Reserve began rolling back a policy that kept yields on U.S. debt ultra low.
In Nigeria, over N101 billion was pulled out in October alone as naira depreciation frightened investors who had been wooed by high yields in equities and fixed income instruments.
Currencies from economies sensitive to oil prices such as the naira and the Russian rouble have been hardest hit as oil price seems to have been tacitly accepted as determinant for currency exchange rate in international market.
Nigeria relies on crude revenues for 95 per cent of its foreign exchange.
Angola’s kwanza hit a record low of N100.895 to the dollar on Wednesday, November 26 just as naira heads towards N179 to the dollar at the interbank market.
At the parallel market, the local currency traded over N186 to the dollar.
Financial experts believe the new target is realistic for a country contending with over 30 per cent decline in world oil prices since June as well as an Islamist insurgency in the North East.
Economists welcomed the action of the CBN as accepting the reality of the naira’s sliding value – in common with the currencies of other oil exporters such as Russia – in trading between commercial banks.
Analysts are concerned that continued depreciation of the naira threatens to stoke inflation by pushing up the cost of imports, on which Africa’s biggest economy relies for around 80 per cent of its consumption.
Over the past two years Nigeria has enjoyed historically low inflation in single digits, a target the CBN is keen to keep meeting. But a surge in living costs ahead of the election in February 2015 will jeopardise government’s chances, all other things being equal.