Rewane projects CBN will spend $8 billion defending naira in 2022

Bismarck Rewane the Managing Director of Financial Derivatives Company Ltd, yesterday, projected the Central Bank of Nigeria (CBN) will spend between $8 and $10 billion to defend the naira in 2020. This, he said, would drag the country’s gross external reserves to between $30 and $32 billion this year.

The gross reserves, which resumed after dipping towards the end of last year, closed at $40.5 billion on January 11. Nigeria’s share from last year’s International Monetary Fund (IMF) special drawing rights (SDR) and proceeds of the Eurobond, had shored up the reserves, halting an era of tumbling that started in 2020.

The Economist, who spoke at the Nigerian-British Chamber of Commerce (NBCC) 2022 Economic Outlook, said the Central Bank of Nigeria (CBN) would not spend less than $8 to $10 billion to support the naira, which has faced fresh pressure at the Investors’ and Exporters’ (I & E) window.

Rewane said the foreign exchange (FX) market could face pressure in the short term with capital outflow expected to heighten. He, however, saw the effective exchange rate gaining as the differential between the official and parallel market rates narrows.

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He added that the absence of “a rate-determining mechanism is a major challenge” the market has faced while expecting rate convergence to continue into the year.

According to him, the CBN’s policy direction will be influenced by global developments just as the Bank would continue with the “adoption of its crawling peg strategy in a shift towards greater exchange rate flexibility”.

He projected that investment activity will suffer amid project delays, low real rates of return and policy uncertainty as travel restrictions, capital controls and supply chain disruptions continue to limit business activity in the near term. 

“Foreign exchange earnings and fiscal revenues will be slow to recover in line with oil price movements and the hydrocarbons production outlook. Limited fiscal space, slow reform momentum and political risks will preclude rapid improvement in the business environment,” he said.

He said inflation would accelerate in the first half of the year before he started decelerating, warning that it was not in the interest of the country to continue to churn out data with integrity issues. He wondered how possibly the country’s inflation could be slowing when the global trend is the opposite.