Euro zone crisis could hit Nigeria hard, says CBN Deputy Governor

deputy governor of cbn

deputy governor of cbn

by Tolu Orekoya

Things are not looking good for the second largest economy in Africa. “Infrastructural bottlenecks” according to CBN Deputy Governor Kinglsey Moghalu have led to a decrease in the rate of foreign investment, a fall in oil prices have led to a decrease in revenue, and if Euro zone banks creditors to Nigeria scale back and break credit lines with their Nigerian counterparts according to Reuters Africa.

“‘There are risks to the economy from the euro zone crisis, if retrenching international banks break their credit lines with Nigerian banks,’ Moghalu said, while a fall in the euro would hit the 15 percent of Nigeria’s $37 billion in foreign exchange reserves which are denominated in euros,” the article said.

From Reuters:

Nigeria, Africa’s largest oil producer, is in danger of losing its allure as a fast-growing investment destination as the oil price falls and infrastructure bottlenecks frustrate investors.

“We cannot rule out any possibility of a rate rise if the circumstances call for it, but we do not have too much more room to raise rates without inflicting damage on the economy,” Kingsley Moghalu told Reuters in an interview on the sidelines of a Nigeria conference.

“Our concern is about the need for structural reform and continued fiscal consolidation – monetary policy is fast reaching its limits.”

Nigeria’s central bank left interest rates on hold at 12 percent this week for the fourth time in a row, citing the need to balance inflationary concerns with slowing growth.

Nigeria’s economy is expected to expand at a slower rate of 6.5 percent this year, down from 7.4 percent in 2011, due to disruptions to oil production and ongoing weakness in developed countries that buy crude from Africa’s largest producer.

Inflation rose to 12.9 percent year-on-year in April, but the underlying trend is seen as relatively benign.

There are risks to the economy from the euro zone crisis, if retrenching international banks break their credit lines with Nigerian banks, Moghalu said, while a fall in the euro would hit the 15 percent of Nigeria’s $37 billion in foreign exchange reserves which are denominated in euros.

A fall in the oil price was also a major concern for Nigeria’s oil-driven economy.

Nigeria’s 2012 budget assumes a $72 a barrel oil price, and oil has been dropping sharply in recent weeks to around $105 a barrel.

“If oil went below $85 a barrel, it could become quite problematic,” Moghalu said.

Nigeria is supposed to save excess oil revenues – over $72 a barrel in the 2012 budget – into an excess crude account to cushion the economy against potential oil price shocks.

But the account has been repeatedly raided by politicians and despite record high oil prices, it contained only $3.5 billion earlier this year.

The possibility that the account, which Nigeria is trying to replace with a more resilient sovereign wealth fund, could run out of money was “quite a clear worry”, Moghalu said.

The Nigerian naira has been hitting 3-1/2 month lows against the dollar and trading at its band limit around 160 per dollar, but the central bank will continue to defend it, Moghalu said.

“We do not have a problem defending the currency at this point, we can also toy with the band,” he said, adding he was not aware of any current plans to adjust the band, currently trading at plus or minus 3 percent around a central rate of 155 per dollar.

Nigeria’s banks, which underwent a $4 billion injection, recently passed stringent International Monetary Fund stress tests, Moghalu said.

“The banking system passed very, very high quality stress tests – IMF stress tests are quite stressful.”

Moghalu said there was interest in Nigerian “bad bank” Amcon’s three nationalised banks from banks and private equity investors, but there was no timetable yet for a sale of the banks.

“There is a huge amount of interest for these banks, both domestically and internationally.”

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