Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, has said that reserves of emerging and frontier markets have been falling because of the rising interest rates in developed economies.
According to him, foreign investors, especially portfolio investors who invested in the capital markets of the emerging markets were returning their funds to their home countries, thereby exiting and leaving huge gaps in the developing economies of the world.
“If you all recall, about 2009, 2010 and 2011, those were the period of quantitative easing. “During that period, there were flows of capital from the U.S and Europe and Japan. Those capital flows ended up in emerging markets and developing countries. “At this time where we are beginning to see reversal in development policy, where interest rates are rising, naturally, those flows are beginning to return back to where they came from. “Practically, all emerging and frontier markets have suffered not just depreciation, but also, they have lost reserves.
“In Nigeria we have done a very good job not only trying to see to it that we maintain a stable exchange rate but also avoid the pitfalls of depreciating our currency so soon in the early days of normalization.”
The CBN boss said he agreed with the need to build buffers but that it was feasible in the present situation. “We are very conscious of the need to build buffers. Unfortunately I will say that we are in a period where it will be difficult to talk about building reserve buffers at this time. “You can only build those reserve buffers if you want to hold on to the reserves and allow your currency to go – and wherever it goes is something else. It’s a choice we have to make.
“But at this time, the choice for Nigeria is to maintain a stable exchange rate so that businesses can plan, so that we don’t create problems in the banking system assets because when these happen, they have very wide ramifications. That is the reason we are maintaining our current position and we believe it is sustainable, at least in the short run.”