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Central bank to buck pressure to devalue naira

04 September 2013, 07:59

Lagos - Nigeria's central bank will resist pressure to devalue the naira since it retains ample funds to defend the currency, a central bank spokesman said, and its governor is expected to stay the course until his term is up in 10 months.

The naira has fallen in recent months, trading outside the central bank's target band of 150-160 naira to the U.S. dollar since June, initially due to foreign investors booking profits on their naira assets, and on importers buying dollars.

Central bank spokesman Ugochukwu Okoroafor said by telephone that the institution remained committed to the band. "We have the resources to meet demand. We are still determined to keep within that band," he said on Monday.

Central bank deputy governor Kingsley Moghalu also said there were no plans to change the band in an interview with Reuters in London on Tuesday.

"We are comfortable with the band as it is currently - we do not have any intention of doing anything spectacular," he said.

But a similar naira weakness, partly caused by excessive spending prior to 2011 national elections, forced the central bank to lower the target band from 145-155 naira to the dollar in November that year, after months of struggling to prop it up.

Pressure on the currency of Africa's second biggest economy will worsen next year as elections loom again in 2015 - traditionally at a time when government expenditure becomes very loose, pumping excess liquidity into the banking system.

"It's the case all over the world - governments tend to spend a lot leading up to elections," Moghalu said.

The unit has hovered around the 162-163 level in recent months, on strong demand for dollars. It touched a 20-month low of 163.70 naira to the dollar last week.

It closed at 163.10 naira to the dollar on Monday, after it became clear the central bank would not intervene again to prop it up. By 0910 GMT on Tuesday it had rebounded to 162.90.

"We believe that the probability of (moving the trading band) is slim in the coming months," said Gaimin Nonyane, an economist at Ecobank, adding that the bank had ample funds.

"Such a move would ... increase inflationary pressures. Given the central bank's commitment to promoting price ... stability, we think the current rate ... will be maintained."

The consumer inflation ticked up to 8.7 percent in July, though Moghalu said he expected it to stay in single digits this year.

Central bank governor Lamido Sanusi has repeatedly warned that excessive election spending poses an inflation risk that he is ready to counter with tight monetary policy.

Analysts expect Sanusi will stick to that path until his planned departure next July when his five-year term expires. RISKS OF DEVALUING

"The central bank will continue to defend exchange rate stability ... as long as governor Sanusi remains in charge," said Standard Bank's Samir Gadio.

Sanusi has spent billions of dollars of foreign reserves over the past months in keeping the naira, which has lost 4.6 percent since the year, within its target corridor.

But Nigerian foreign exchange reserves stood at $46.85 billion by Aug. 29, down only 0.23 percent month-on-month from July, so they are not being rapidly depleted.

"Nothing about the central bank's recent guidance or behaviour suggests that is about to allow a devaluation of the naira," said Alan Cameron, economist at CSL Stockbrokers.

The bank tightened liquidity significantly in July, slapping a 50 percent reserve requirement on public sector deposits, up from 12 percent previously. That sucked 1 trillion naira out of the banking system and although the effect on the naira was shortlived, it showed the lengths to which the bank will go.

Moghalu said, however, that the purpose of the reserve requirement hike was to encourage banks to lend more, rather than to boost the currency.

"We would like to see more real economy lending and an expansion of the deposit base, and higher deposit rates, so that people can save," he said.

Another factor, said Charles Robertson, economist at Renaissance Capital, was that pressure on emerging market currencies generally could subside in the coming weeks, so the naira may start to recover all by itself.

"We are comfortable," said Moghalu. "The naira has appreciated a bit in recent days."

- Reuters


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