CBN Blows $36 Billion Defending The Naira In 2018, Up 130% From 2017

  • CBN Blows $36 Billion Defending The Naira In 2018, Up 130% From 2017
  • The Central Bank of Nigeria sold a whopping $36.6 billion in forex in 2018 according to a report released during the week on its website. This compares to $15.8 billion sold in 2017, a whopping 130% rise.

    The report, 2018 Activity report, is aimed at “informing the public of the measures taken by the Department to implement the decisions of the CBN and its Monetary Policy Committee towards the achievement of price and financial system stability.”

    Key numbers: The CBN explained the breakdown of the $36.6 billion as $25.6 billion for spot sales and $11 billion in forward transactions.

    • Included in the spot sale was $8.2 billion sold in the I&E window.

    • The I&E window is where investors come to buy and sell forex and its the closest to a market with an exchange rate that floats.

    • Total sales in 2017 were $15.8 billion lower than spot sales recorded in 2018. The bank reported that spot sales for 2017 were just $3.4 billion compared to $25.6 billion in 2018 alone.

    • Net sales (sum of forex sold and bought by the CBN) was $17.8 billion in 2018 compared to $9.7 billion in 2017

    Numbers explained: The higher sales recorded in 2018 suggest there was more demand for forex in 2018 compared to 2017. Thus, to keep the exchange rate stable and speculators at bay, the CBN had to increase its defense of the naira by selling more dollars. This is further buttressed by the more than 8 folds increase in spot sales with most of it targeted at the I&E window where foreign investors trade.

    By burning through reserves, the CBN sacrifices forex savings for naira stability hoping that this will help drive down the inflation rate. Critics believe this might be work in the short term but it is detrimental in the long run when we factor in the opportunity cost of burning out reserves.

    CBN’s explanation: “The increased volume of transactions in 2018 was attributable largely to the Bank’s foreign exchange policy and its management, coupled with the improvement in the levels of foreign reserves during the year.”

    The exchange rate debacle: Most analysts we have spoken to believe the exchange rate is somewhat overvalued at N365. They point to frequent interventions in the FX market by the CBN as one of such artificial dynamics that inhibits price discovery. The more CBN intervenes to stifle demand the better the chances of the naira holding sway at its current price.

    The upshots: Now that the presidential elections are over and the Central Bank Governor guaranteed another term of 5 years, the focus will not be channeled at how the CBN plans to manage the exchange rate. Will it be more of the same or a change of course. Rumours that the CBN might devalue something this year will likely persist. Some believe it is just a matter of time particularly if oil price fails to recover past the $70 mark.
    Source:toptipz.com.ng

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