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CBN expects external reserves to reach between $29.9 billion and $34.3 billion by end of 2020

BY David Olalele



CBN Governor, Godwin Emefiele

The degree of external reserves accumulation would drop as outflows are expected to outweigh inflows in the remaining part of this year, the Central Bank of Nigeria (CBN) has declared.

The CBN explained that external reserves are expected to lie between $29.9 billion and $34.3 billion at the end of December 2020, as they are predicated on declining oil price of between $20 and $40. obtained this from the apex bank’s latest report on Monetary, Credit, Foreign Trade and Exchange Guidelines for Fiscal Years 2020/2021.

Read part of the report below:

Sequel to the COVID-19 pandemic, the viability of the external sector in 2020 is expected to deteriorate, given the present worsening current account balance and depletion of external reserves driven, largely, by decelerating export receipts, particularly oil.

Specifically, the degree of external reserves accumulation is expected to decelerate, as outflows are expected to outweigh inflows.

As a result, external reserves are expected to lie between US$29.9 billion and US$34.3 billion at end-December 2020 (predicated on current declining oil price between US$20 and US$40).

This development, in addition to exchange market pressures, emanating from speculative activities in the BDC and I & E segments of foreign exchange market, is expected to exert pressure on the naira exchange rate.

In addition, increased risk aversion behaviour by investors may negatively impact on capital inflow, as they flee to safe-haven assets.

Also, it is projected that the fiscal space may be limited in 2020, given escalated vulnerability, as a result of sharp decline in oil prices, occasioned  Monetary, Credit, Foreign Trade and Exchange Guidelines for Fiscal Years 2020/2021 17 by weak global oil demand and price wars between Russia and Saudi Arabia.

This development would undermine the implementation of Government’s capital programmes, impede public investment on infrastructural development and could culminate to higher debt profile and attendant debt service obligations of the Government.

If the COVID-19 pandemic effects became severe, Government may increase fiscal policy responses to ameliorate the impact on the populace.

The financial sector is expected to remain resilient in 2020, on account of the accommodative monetary policy stance continued efforts by the Bank towards ensuring financial system stability and credit expansion policies.

Furthermore, the renewed policies aimed at enhancing the payments system and cash-less initiative are expected to sustain efficiency, safety, and confidence in the Nigerian payments system.

Against this background, policymakers are expected to nurture the fragile phase of the economy with caution and employ appropriate policy instruments to tackle the likely adverse effects that may emanate as a result

Monetary, Credit, Foreign Trade and Exchange Guidelines for Fiscal Years 2020/2021 18 of the COVID-19 pandemic. The fiscal space should be optimally utilized, along with the implementation of structural policies to boost growth and welfare over the medium-term. Furthermore, harmony between fiscal and monetary policy remain crucial to sustain and strengthen growth in the future.

Finally, structural reforms, particularly executing the much-delayed power sector recovery plan, implementing the financial inclusion strategy, and addressing infrastructure gaps remain essential to boosting inclusive growth.

In 2020/2021, the primary objective of monetary policy remains the maintenance of price and financial system stability. With the upward trend in inflation from the first half of 2019, lingering uncertainties from the external environment would exert pressure on monetary tools.

The CBN in 2020, will continue to sustain measures to abate the level of rising inflation through effective liquidity management measures.

The aim is to curtail the level of inflation to a level that is conducive for inclusive and sustainable growth. The Bank shall continue to be proactive in its oversight function of the banking system to continue to ensure financial system stability.

Furthermore, it will maintain sound, stable, and efficient payment systems to support the conduct of monetary policy.

The monetary targeting framework remains the monetary policy strategy in 2020/2021 fiscal year with implicit inflation targeting.

Consequently, the growth in broad money supply (M3) will be closely monitored in line with the projections for 2020 and 2021.

Monetary, Credit, Foreign Trade and Exchange Guidelines for Fiscal Years 2020/2021 20 3.2. Policy Measures The CBN would continue to take appropriate measures to promote internal and external balance of the economy, as such it would constantly review developments and effective use of monetary policy tools.

These are meant to anchor inflation expectations, manage liquidity, ensure appropriate exchange rate regime and anchor short term rates.

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