One of the issues raised in the current Standard Chartered Bank’s research publication, ‘On The Ground’, released at the weekend was on naira depreciation and plans by Nigerian banks to inject fresh capital to mitigate the new demand to be able to compete internationally.
Although the banks have reduced considerably the extent of their US dollar lending (estimated at about 40 percent of loans as at end-2014), the report said any further significant naira depreciation might call into question the capital adequacy of a number of institutions, as more naira capital would be needed to support dollar lending.
Razia Khan, managing director, chief economist, Africa global research, Standard Chartered Bank, London, noted in the report that Central Bank of Nigeria (CBN) might have to offer temporary forbearance to undercapitalised banks, or it might need to formulate a recapitalisation plan for some of Nigeria’s more vulnerable banks, prior to any planned foreign exchange liberalisation.
“Plans for new capital-raising by Nigerian banks will also be closely watched for signals of a likely change in the policy stance of the Nigerian authorities”, the report stated.
However, Godwin Emefiele, governor of the CBN had also at the weekend pointed to a sign that the Bank may be disappointing the analysts or some group of people who are canvassing for floating of the naira.
“The CBN cannot sit idly bye and allow such faceless and criminally minded people to destroy the currency under the guise of a free float as is being canvassed by some so called experts. In fact, I have always had one simple question for this group of persons: name me just one country in the whole world that practices a freely floating exchange rate regime? Just one. I have heard commentators suggest we should follow Egypt’s example and free the Naira.
“What they do not tell you is that following their currency adjustments; inflation today in Egypt is over 30 percent. Is that what we want in Nigeria?
The demand for forex from the market has continued to be aboutUS$4.8 billion monthly.
Emefiele said the CBN dealt with the supply side of the problem by allowing commensurate depreciation of the currency several times.
“Having done this, and bearing in mind the devastating effects of significant depreciations on inflation, purchasing power, government debt service, financial system stability, fuels and energy prices, unbiased and reasonable people would agree that we also needed to do something with the demand side of the problem. Why exactly should we spend scarce forex resources paying for things we can produce here in Nigeria? I believe that only entrenched interests, who do not have the interests of ordinary Nigerians at heart, would want us to do so”, Emefiele added.