CBN To IMF: We Prefer Stable Exchange Rate Now To Building Reserves

CBN To IMF: We Prefer Stable Exchange Rate Now To Building Reserves

The Central Bank of Nigeria, CBN, Sunday responded 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, saying CBN’s policy preference for now is to maintain exchange rate stability.

CBN Governor, Mr. Godwin Emefiele said this during joint press briefing of the Nigerian delegation to the World Bank/IMF 2018 meeting concluded in Bali, Indonesia.

He also indicated that the Nigeria’s apex bank has performed relatively better than most emerging markets and third world central banks in the area of both exchange rate stability and reserves in the wake of the normalisation policy of the U.S.A.

Like other emerging countries, 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 in the face of increased dollar demand from foreign portfolio investors exiting the nation’s financial markets in response to the rising interest rate in the U.S.A. and other advanced economies.

Several sessions of the Meetings have harped on the need for some pre-emptive measures, especially in building reserves by third world countries.

The IMF Head, Emerging Economies Regional Studies Division, European Department, Anna Ilyina, had, last Wednesday, 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.

Responding to a question from newsmen in Bali, Indonesia, on the position the apex bank would take in the face of this challenge, Emefiele stated: “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.”

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