Nigeria's central bank (CBN) left its benchmark interest rate on hold at 12 percent on Tuesday, as expected, but took measures to tighten liquidity to support the weakening local naira currency.
The CBN's Monetary Policy Committee (MPC) raised banks' cash reserve requirement to 12 percent from 8 percent and reduced net open foreign exchange positions to one percent from three percent to support the naira.
“This is huge and a clear statement of resolve on the part of the authorities on their determination to support the naira despite considerable external threats,” said Razia Khan, head of Africa research at Standard Chartered.
“We expect the naira to strengthen on the interbank market on the back of this,” Khan added.
The naira has been hit by a fall in the price of oil, Nigeria's main export, and global risk aversion and has weakened by almost 3 percent against the dollar since April.
The naira closed at 160.7 against the US dollar on Tuesday, outside the central bank's 150-160 target trading band.
Currency weakness is aggravating inflation as Nigeria imports 80 percent of what it consumes.
Consumer inflation rose to 12.9 percent year-on-year in June, up from 12.7 percent in May. The CBN expects it to peak around 14 percent later this year.
Central Bank Governor Lamido Sanusi said on Tuesday there were serious risks to growth in Africa's second largest economy due to weaker global growth, lower oil output and the government's failure to push through reforms and projects.
“The ominous signs for the domestic economy are evident,” Sanusi said while delivering the MPC decisions in Abuja.
“The committee observed that since its meeting in May growth prospects have been threatened by developments (globally) as well as the very slow progress in structural reforms and poor implementation of the capital budget in 2012.”
Some members of Nigeria's parliament said last week President Goodluck Jonathan could be impeached if his government doesn't implement all the projects in the 2012 budget by the time lawmakers return from their recess in September.
Sanusi also said Nigeria was unprepared for a potential oil price slump because government was spending the country's savings, which are stored in the excess crude account (ECA).
The ECA held $20 billion prior to the 2007 global economic crisis, helping cushion Nigeria against slowing growth but despite record high oil prices in recent years the ECA now contains around $6 billion. This is not enough to support the economy from falling oil prices, Sanusi said.
He also highlighted the risks posed to Nigeria's economy from the worsening security environment.
Oil theft has increased sharply this year in the southern oil-producing Niger Delta and could cost the government around $5 billion annually, oil companies have said. Meanwhile, an Islamist sect Boko Haram's insurgency in the north is hampering development of agriculture, which makes up 40 percent of GDP.
Nigeria's economy grew 6.17 percent in the first quarter this year, down from 7.68 percent in the fourth quarter last year. The economy is projected to grow at 6.5 percent on average this year, down from 7.4 percent in 2011.
The CBN has kept rates on hold since November, after six successive hikes last year, including a 275 basis point rise in October to 12 percent, to ward off speculation on the naira. The naira fell 4.5 percent against the dollar last year.
Eleven analysts polled by Reuters last week had expect the central bank's MPC to keep its benchmark rate unchanged. - Reuters