A further sharp decline in reserves


Thursday, March 05, 2015 8:56 AM / FBN Capital Research


Data from the CBN show that official reserves decreased by US$2.9bn in February to US$31.4bn. The fall could be divided between US$1.8bn before the CBN announced the abandonment of the retail Dutch auction system (RDAS) on 18 February, and US$1.1bn afterwards. So the CBN is no longer drawing on official reserves to supply its auctions but is intervening in the fx market at its clearing rate.

In the absence of recent trade data, we assume that there has been a downward adjustment to import demand in response to the slide in the naira exchange rate. If there has not, it would be an exception to the standard relationship between the demand for, and the price of a commodity.


We also assume that the elections have added to import demand. The end of the process should therefore remove some of the pressures in the market.


If the CBN was to abandon its efforts to manage the rate, the naira would fairly quickly find its level.


This, however, is not on the agenda, and we have instead the CBN’s many administrative measures, which have led to much reduced liquidity and fx trading volumes. There are sound opposing arguments that the measures will bring further depreciation or stability on the interbank market. The oil price is unlikely to come to the CBN’s rescue anytime soon although our hunch is that, once the electoral cycle is finally concluded, fx market pressures will ease.

Nigeria’s external reserves are sufficient to provide 7.3 months’ cover for merchandise imports at (higher) 2013 levels, and 5.1 months when services are included. The latest data (from end-June) put the CBN’s share of official reserves at 80% of the total.

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