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International lenders desert Nigeria’s central bank

Several banks will not renew agreements worth billions of dollars with Nigeria’s central bank, highlighting the erosion of confidence in the monetary authority, according to a Financial Times report. 

The move, which relates to foreign currency swap agreements between banks and the central bank, risks depleting the country’s dwindling foreign reserves as Nigeria faces a severe dollar shortage, bankers warn. 

Analyzing the report titled ‘Lenders plan not to renew deals with Nigeria’s central bank for Elombah.com, an investment expert cautioned Nigerians to “Fasten your seat belts”, he explains: “Financial crisis are caused by a lack of confidence. 

“They are often triggered when those from whom the government has to borrow money lose faith in its ability to navigate it’s way through its difficulties. 

“Once markets believe the government does not know where it is going, or it is divided within itself and has no contingency plan should events turn nasty, confidence evaporates!

“When that happens, it is almost impossible – absent an IMF loan- to get it back. 

“However, an IMF loan is almost impossible to get unless Americans are in favour of it.

“So perhaps we should look for Mrs Ngozi Okonjo-Iweala to attract the international community after all.”

The Financial Times report pointed out that Nigeria’s gross reserves have plummeted by 40 per cent to $24bn since oil prices crashed in mid-2014 as Africa’s top crude producer grapples with its worst economic crisis in decades. The shortage of greenbacks is already choking important sectors of the economy, from airlines to importers of fuel to manufacturers.

Godwin Emefiele, central bank governor, has sought to use foreign currency swaps to bolster dollar reserves, swapping large amounts of naira in return for dollars with about six of the country’s 22 banks. 

But bankers say they have begun refusing to allow the central bank to renew these swaps — most of which expire within the next year — because they have lost confidence in Mr Emefiele’s management of the currency and foreign exchange market. 

“If you don’t have a clear sense that the central bank has policies in place to keep reserves at a reasonable level, of course you worry about their ability to repay and become more cautious,” said the head of a bank in Lagos.

The central bank is holding less than $4bn in foreign currency swaps according to data on its website, which is not large enough to trigger a currency crisis overnight. But bankers and analysts say the decision by banks to reduce their exposure to the central bank highlights broader concerns in the market that has caused investors to virtually stop bringing hard currency into Nigeria. 

Without the return of foreign capital inflows, they say, Nigeria cannot climb out of recession. 

A chief complaint among bankers and analysts is that central bank continues to intervene to prop up the value of the naira despite Mr Emefiele announcing in June that monetary authorities would move to a “purely market-driven” currency system.

Bankers say the lack of policy credibility in managing the currency raises questions about Nigeria’s ability to provide dollars to banks as a recession deepens. 

Concern over the wide range and growing amount of central bank liabilities has caused bankers and economists to monitor net dollar reserves as a more accurate gauge of Nigeria’s financial health rather than official gross reserves.

Bankers warn that net reserves could be — depending on how liabilities are estimated — significantly less than the $24bn gross reserves, which is equivalent to about five months of imports.

“The net reserves level is now a very serious concern because the government has not been able to attract new funding flows to grow its reserves and all we have seen over the past 18 months is a consistent reduction in reserves,” said Dapo Olagunju, treasurer of Access Bank, one of Nigeria’s biggest banks.

Mr Emefiele has been asked repeatedly at investor forums and in meetings to state the net reserves level. He has declined to do so, according to investors and bankers who say they have asked him. 

Asked by the Financial Times last week, Mr Emefiele declined again, but said that the difference between gross and net reserves was “negligible”.

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