The central bank of Nigeria will strive to protect the country’s currency reserves after a court ruling in the United Kingdom granted a small natural gas firm the right to try to seize $9bn in assets from the Nigerian government, the bank’s head said on Monday.
Such a sum would be one of the largest financial liabilities imposed on Nigeria in its history, representing 20 percent of the currency reserves of Africa’s largest economy and top oil producer.
Central bank chief Godwin Emefiele said that Nigeria has sufficient grounds to appeal the ruling, which concerns an aborted gas project in the southern Nigerian city of Calabar and was made on Friday in favour of Process and Industrial Developments Ltd.
“We know that the implication of that judgment has some impact on monetary policy,” Emefiele told reporters in the capital, Abuja. “That is why the central bank is going to step forward and … defend the reserves.”
Pressure has been building on the naira, Nigeria’s currency, as oil prices drop.
Also, foreign investors have been locking in their profits on local bonds as yields have fallen from as high as 18 percent a year ago. As yields have fallen – with bond prices moving up – foreign inflows have slowed. This in turn, has led to a shortage of dollars and depressed the naira.
In a further sign of pressure on the currency, President Muhammadu Buhari last week told the central bank to stop providing funding for food imports, his spokesman said.
‘Fuel to the fire’
Emefiele did not specify what other measures the central bank might take to defend the country’s currency or its foreign exchange reserves.
“FX [foreign exchange] pressures have intensified,” said Cobus de Hart, senior economist at South Africa’s NKC African Economics.
He said that “the UK judgment could add further fuel to the fire”.
“Worryingly, the central bank is employing unconventional tools more regularly to try and keep the naira stable and safeguard reserves,” de Hart added, suggesting that ongoing risks could result in “slower growth and higher inflation”.
On Monday, traders were seeking higher rates for one-year treasury bills as the naira weakened.
The naira has been quoted at 364 per dollar for foreign investors since last week, weakening from 363.50 as liquidity dries up on the foreign exchange market.
Nigeria operates a multiple exchange rate regime that it has used to manage pressure on the currency.
Last week, Emefiele met fund managers in London in a roadshow as the central bank told dealers to lure foreign investors by raising rates.
Emefiele sought to reassure investors – who seemed focused on lower oil prices and debt woes – by saying that Nigeria’s currency would continue to be stable.