CBN warns Nigerian government on depletion of Excess Crude Account, foreign reserves

Central Bank Governor, Lamido Sanusi

The CBN also retained the Monetary Policy Rate at 12 per cent
The Central Bank of Nigeria, CBN, on Tuesday decried the continued depletion of Nigeria’s foreign reserves and excess crude revenue account, ECA, by the Federal Government, saying this portends grave danger to the economy.
The CBN governor, Lamido Sanusi, said at the end of the 93rd Monetary Policy Committee, MPC, meeting of the bank in Abuja that with activities towards the 2015 election gathering momentum, 2014 would be one of the most difficult years in the country in recent times.
The CBN Governor pointed out that as at December 31, 2013, the country’s gross external reserves was about $42.85 billion, representing a decrease of about $ 0.98 billion, or 2.23 per cent when compared with about $ 43.83 billion recorded at end- December 2012.
Attributing the shrinking reserves level to a slowdown in portfolio and foreign direct investment, FDI, flows in 4^th quarter of 2013, the governor said this resulted in increased funding of the foreign exchange market by the CBN to stabilize the currency.
Mr. Sanusi also said the MPC was concerned that the ECA, which had a balance of about $11.5 billion in December 2012, has now declined to less than $2.5 billion as at January 17, 2014. The depletion of the ECA was a major point of altercation between Governor Rotimi Amaechi of Rivers, and the Finance Minister, Ngozi Okonjo-Iweala. Mr. Amaechi had accused the federal government of mismanaging the ECA to its present level, a claim the finance minister denied.
Mr. Sanusi, however, warned that the depletion of the ECA was a risk to exchange rate stability and other economic indicators.
“This absence of fiscal buffers increased our reliance on portfolio flows thus, constituting the principal risk to exchange rate stability, especially with uncertainties around capital flows and oil price,” he said.
Noting the sustained stability of the exchange rate and single digit inflation in 2013, the committee considered the “depletion of fiscal buffers following the continuing decline in oil revenue, rundown of reserves and depletion excess crude oil savings.”
The Committee condemned the continuous fall in revenue from oil despite stable price of oil and production in 2013, though it acknowledged the incidence of output losses due to theft and vandalism.
Mr. Sanusi said these were undermining the ability of the Central Bank to sustain exchange rate stability, urging the fiscal authorities to take steps to block revenue leakages and rebuild fiscal savings needed to sustain confidence and preserve the value of the naira.
“2014 will be a difficult year, as a result of a number of external reasons. It will be tough for the CBN and the fiscal authorities, particularly with the election coming up in 2015. But as the inflows begin to slow down, we need to retain our oil revenues; we need to stop the theft and the vandalism and the leakages and save the money to build reserves.
“One of the good things about not having a lot of money in the ECA is that there would not be much ammunition to spend (during elections) since the money is not there. In the monetary policy perspective, there isn’t too much fiscal fire power available.
“Monetary policy has limits. Beyond a point, something has to give. There is a limit MPR and CRR can go. Beyond a point, one has to allow the Naira drop. And the consequences of that are clear on stock market, inflation, banking system. So, we have a stability that is very good, but fragile. But, we can make it strong, by improving our fiscal position and building up of our reserves,” Mr. Sanusi said.
Mr. Sanusi also said the Committee resolved during its meeting to allow monetary policy rate, MPR, otherwise known as the lending rate for banks, to remain at 12 per cent, with +/- 200 basis points, and liquidity ratio, LR, at 30 per cent.
Similarly, he said public sector Cash Reserve requirement, CRR, was raised from 50 per cent to 75, to address excess liquidity in the banking system, while private sector CRR was retained at 12 per cent.
The National Bureau of Statistics, NBS, had estimated real Gross Domestic Product, GDP, growth rate of 7.67 per cent for the fourth quarter of 2013, which was higher than the revised figure of 6.81 and 6.99 per cent recorded in the third quarter, and the corresponding period of 2012, respectively.
Overall, growth rate for fiscal 2013 was estimated at 6.87 per cent, up from 6.58 per cent in 2012.
Though the Committee noted the year-on-year headline inflation, which remained within the 6-9 per cent target range in the second half of 2013, it stressed the need to halt rising inflation in 2014 through concrete actions to stabilize the currency and minimize the divergence between the two segments of the foreign exchange market.