The bank also decided to increase the cash reserve ratio on public sector deposits to 75 percent, from 50 percent, while the one for private sector deposits was left at 12 percent, aiming to support the naira. The Central Bank showed concerns about a drop in Nigeria's foreign exchange reserves due to lower crude oil savings and falling inflows from portfolio investors.
Excerpt from the statement by the Central Bank of Nigeria:
The MPC welcomed the sustained stability of the exchange rate and single digit inflation in 2013. It, however, identified four key concerns for policy in the short- to medium-term:
1. Depletion of fiscal buffers following the continuing decline in oil revenue, rundown of reserves and depletion of excess crude oil savings;
2. Falling portfolio and FDI inflows;
3. Widening gap between the official and the BDC exchange rates; and
4. Creeping increase in core inflation.
On the depletion of fiscal buffers, the Committee decried the continuous fall in revenue from oil despite stable price of oil and production in 2013. Although the Committee acknowledged output losses due to theft and vandalism, this could not wholly explain the magnitude of the shortfall in revenue. As a consequence, accretion to external reserves remained low while much of the previous savings have been depleted, thereby undermining the ability of the Central Bank to sustain exchange rate stability. The Committee therefore, urged the fiscal authorities to block revenue leakages and rebuild fiscal savings needed to sustain confidence and preserve the value of the naira.
The MPC also noted the reduction in portfolio inflows driven by the commencement of the QE3 tapering by the Fed, transition concerns at the CBN and continued depletion of the ECA, thus dampening investor confidence. The reduction of the US stimulus especially, could in addition, trigger capital flow reversals and put greater pressure on the naira exchange rate.
The Committee re-affirmed its commitment to a stable exchange rate regime while urging the fiscal authority to provide support by reducing fiscal leakages, improving controls around oil revenues and reviewing terms around production sharing agreements with oil companies, while awaiting the passage of the Petroleum Industry Bill (PIB). The Committee also noted the necessity for a complementary monetary policy response to ensure sustained exchange rate stability and convergence of rates in various segments.