External reserves’ depletion threatens rate cut hopes

Hopes that the steady decline in inflation could persuade the Central Bank of Nigeria (CBN) to hearken to calls for a cut in interest rates may be in jeopardy due to the recent downward trend of the nation’s external reserves, findings by New Telegraph has shown.

The apex bank’s Monetary Policy Committee (MPC) had left the benchmark interest rate, the Monetary Policy Rate (MPR), at 14 per cent since July 2016 despite pressure from some stakeholders, especially the Organised Private Sector (OPS), which argues that easing is needed to enable its members access credit at lower interest rates so that they can increase industrial capacity, thereby boosting the nation’s economic growth.

Indeed, last January, the CBN Governor, Mr. Godwin Emefiele, had projected that with inflation declining, the regulator ‘s rate setting committee, the MPC, could start cutting interest rates in the first half of the year.

He said then that once inflation got to low double digits: “and high single digit happens, then it should be easy for the MPC to begin to look at easing.

“I want to think that between the end of the first and second quarter, we should begin to see easing,” he added.

However, around the time the banking watchdog boss made this prediction, the nation’s external reserves were on an upward trend and Emefiele had, in fact, predicted last April that the reserves, which had risen to $47.4 billion as at April 5, would hit the $50billion mark by the end of this year.

But the external reserves, which stood at $47.798billion on July 5, had been declining since then, dropping to $47.119billion as of July 31 and further fell to $46.868billion on August 6, the lowest level in nearly four months.

Specifically, data from the CBN shows that the external reserves fell by $669million last month.

Analysts attribute the reserves’ depletion to the exit of foreign investors from the Nigerian market following the normalization of monetary policy in the United States, coupled with anxiety over elections in Nigeria scheduled for February next year.
For instance, in a report released last week, analysts at FSDH Research noted that the external reserves steadily declined in July.

According to the experts: “This was due to the foreign investors’ pull-back from the Nigerian market and the increase in demand at the foreign exchange market. The 30-day moving average external reserves decreased by 1.32 per cent, down from $47.79billion at end-June to $47.16billion at the end of July.

“The total inflow through the Investors’ and Exporters’ FX Window (I&E Window) between April 2017 and July 2018 stood at $34.29billion. Our analysis shows that the total inflow through the Investors and Exporters Window in July was the lowest figure recorded since August 2017. The two largest contributors to the inflow in July were $0.56billion from other corporates, and $0.54billion from Foreign Portfolio Investments.”

They hinted that the CBN’s dollar buffers may have declined even further but for favourable crude oil price, which boosted the external reserves in the short-term despite   the slowdown in foreign capital inflows.

Furthermore, although the country’s inflation rate fell for the seventeenth consecutive month to 11.23 per cent in June, the general belief is that pre-election spending coupled with the late implementation of the 2018 budget could trigger inflationary pressures thus preventing the CBN from cutting interest rates.

Interestingly, speculation has been growing in recent weeks that instead of a rate cut, the CBN, could in fact be considering more tightening.

This conjecture was fueled by remarks said to have been made by a CBN Deputy Governor, Dr Joseph Nnanna, at a conference in Egypt. According to an agency report, Nnanna said virtually all members of the MPC had supported the idea : “The Monetary Policy Rate should increase if inflationary pressures build up.”

The report noted that while inflation has declined to below the MPR, the MPC has shifted from some members voting for rate cuts in January to three of 10 members favouring higher rates at the committee’s July meeting.

Nnanna was quoted as saying: “These factors would warrant a rate increase to send the right signal to the public, that the central bank will tighten policy to respond to higher inflation. There’s a scope to raise rates before the elections in February. The central bank is still in the mood for tightening. How fast are we going to tighten is what members haven’t agreed upon.”

While the individual member statements from the July MPC meeting have not been released, one person voted for 25 basis-point hike and two wanted to raise the rate by 50 basis points. Nnanna reportedly voted for a 50 basis-point increase in May.

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