The Central bank of Nigeria (CBN) is showing it will do all it takes to keep the naira from weakening against the dollar even if comes at a cost of starving the private sector of credit or burning through the country’s external reserves at a record pace.
Keeping the naira as strong as possible against the dollar is popular in Nigeria, which imports the bulk of its needs from other countries. That has been a priority for most central bank governors whose fixation on exchange rate stability is also in recognition of its impact on price stability, a core mandate of any central bank.
With two currency devaluations under his belt, the current Central Bank Governor, Godwin Emefiele, is prepared to fight off another naira depreciation in the months leading up to the general elections in February 2019 even though the rate of foreign capital outflows make it a daunting task.
Foreign capital outflows are expected to intensify on the back of rising yields on US Treasuries and heightened political risk premiums on Naira assets which implies more downside pressure on the exchange rate.
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At a special window for investors and exporter, the naira has already weakened from N360 per US dollar at the start of the year to an average of N363 in October and N363.32 at close of trading, November 1.
But as pressure mounts on the exchange rate from foreign outflows, the CBN has reiterated a firm commitment to nominal exchange rate stability.
However, the means by which the CBN has set out to achieve that goal is piling pressure on an economy still struggling to recover from a 2016 recession caused by low global oil prices and a decline in production volumes following militant attacks on oil infrastructure in the country.
To fight off a weaker exchange rate, the CBN is bidding short term interest rates higher, a scenario that could further batter the government’s ailing finances and take affordable credit away from the reach of the private sector.
At an auction Wednesday, where Treasury bills worth N145.29 billion were issued, the stop rates on the T-bills trended upwards compared to the stop rates at the previous auction.
The stop rate on 91 day T-bills was 10.975 percent compared to 10.96 percent at the previous auction, while the rates of 182 day and 364 day T-bills rose to 13.49 percent and 14.4 percent respectively from 12.69 percent and 13.45 percent.
With average bond yields at around 14 percent, the rise in T-bill yields is gradually leading the country’s yield curve towards an inversion last seen in 2017 when short term rates outpaced long term rates and mounted pressure on government’s debt service costs which had spiralled to a record high of 69 percent by the end of the year.
Faced with the possibility of a larger budget deficit that could hit N4 trillion in 2018 amid disappointing revenues, the government is likely to overshoot its borrowing and that will come at a larger cost with the uptick in interest rates, thus limiting the government’s ability to implement its proposed capital expenditure.
The private sector will also bear the brunt of higher interest rates in the form of limited access to affordable credit. Higher interest rates also tend to be negative for stocks as investors interpret it as a possibility for higher finance costs and reduced profitability for listed companies (which have already taken a beating this year over foreign capital outflows and political uncertainty).
The All Share Index of the Nigerian Stock Exchange, which tracks the average price movement of listed companies, was down 1.42 percent Thursday, extending a two day losing streak.
“When the effective yields on one year T-Bills is as high as 17 percent, the incentive is against risk taking and credit growth to the private sector,” said Wale Okunrinboye, head of research at Lagos-based Pension Fund Administrator, Sigma Pensions.
“The banks won’t lend to the private sector when they can park cash in safe government assets and that’s not how to grow a struggling economy,” Okunrinboye said in an interview with Business Day. “It’s the price we are paying for pursuing a strong naira, but it is not worth it,” Okunrinboye added.
Bank lending to the private sector is already dipping on account of weak economic activity and political uncertainty, with the big banks all cutting their loan books in the first half of 2018, according to data complied by Business Day and obtained from their financial reports.
The loan books of Guaranty Trust, Zenith, Access, United bank for Africa and First bank, shrank cumulatively by 6.6 percent as at June 2018 compared to the level at the end of 2017, with the country’s largest bank by market capitalisation, GTB, and the largest bank by assets Zenith, contracting the most by 11 percent a piece.
Rising interest rates compounds the woes of the private sector as the banks have a viable alternative to invest in, leaving business starved of credit and putting the economy at risk of retardation.
“The banks that are already reluctant to lend would have an even thinner appetite for lending,” said Ayodeji Eko, managing director of Lagos-based investment bank, Afrinvest Securities.
According to Ebo, the banks also face the threat of slower deposits mobilisation in the event of higher interest rates as people redirect idle cash lying in their bank accounts to government securities to make returns much higher than the 2 percent on savings accounts.
Yields as high as 18 percent in 2017 saw bank deposits grow at the slowest pace since 2010, as investment-savvy depositors put money in government securities.
Banks also made a killing from investing in treasury bills last year but were already starting to adjust to a lower yield environment informed by reduced government borrowing in the domestic market as yields collapsed to 12 percent at the start of 2018.
Yields on government securities are however heading north again and are now at around 14 percent. Analysts are unsure how much the Central bank is willing to bid interest rates higher to achieve its goal of exchange rate stability but say the Abuja-based bank will give it whatever it takes at least until after the 2019 elections.
The CBN, in its bid to keep the exchange rate stable, has also had to up its dollar interventions to save the naira some face against the dollar as emerging market currencies buckle under a market sell-off.
The interventions have come at the expense of foreign reserves which has shed 10.6 percent or $5 billion from a peak of $47 billion as the end of July to $42.1 billion at October 26, according to official data.
In the space of one month, the foreign buffer of Africa’s largest oil producer is down by $2 billion, having stood at $44.02 billion in October, marking the biggest monthly decline since February 2015. Never mind that oil prices crossed a a four-year peak of $80 per barrel in October but have since cooled to $75 per barrel, November 1.
Recent data for September shows that the CBN sales at the I&E segment climbed 41 percent to USD 2 billion from August levels, which mirrors recent comments by the CBN governor about a firm commitment to nominal exchange rate stability.
After hitting a record high of $2.14 billion in the week ended September 14 2018, turnover at the I & E window, created by the Central Bank of Nigeria (CBN) to ease a dollar crunch that starved the economy, declined to a year to date low of $880 million in the week ended October 19, according to data from trading platform, FMDQ.
“This is expected in light of the capital outflows in the past months,” Ebo, who thinks the external reserves are still at healthy levels compared to when they tanked to $28 billion in 2016, said.
“The domestic demand for dollars has grown significantly due to the speculations that the naira may depreciate after the 2019 general election, hence increasing buying interest,” Ebo said in an emailed response to Business Day.
Muda Yusuf, who heads private sector advocacy group, Lagos Chamber of Commerce and industry (LCCI), said rising interest rates would crowd out the private sector and put a cap on economic growth but admits the CBN may face a dilemma in deciding whether to allow the naira weaken and watch inflation accelerate or to stimulate credit growth.
Headline inflation has consistently risen in the last two months following an 18-month consecutive decline as low base effects fade and the outlook is for price growth to gradually increase through the year.
The Monetary Policy Committee at its last meeting in September held interest rates at 14 percent, where it has been for two years now, citing election spending risks to inflation, despite flailing economic growth.
Nigeria’s economy expanded 1.7 percent in the first half of this year and is tipped by the International Monetary Fund (IMF) to grow 2 percent by year-end compared to 0.8 percent in 2017 and -1.6 percent in 2016. In GDP per-capita terms, the economy is still in doldrums with economic growth rate below the population growth rate of around 3 percent.
LOLADE AKINMURELE
