Nigerian president, bankers meet on currency drop

"I will not sit down here and allow Nigeria to hemorrhage to the point of death on the altar of liberalisation," President Olusegun Obansanjo said in a statement issued after the meeting. "There will be no runaway devalution here."

The central bank suspended forex trading in Nigeria on Apr 10 after the naira fell to 115.7 against the dollar from 110.7 the previous session. The naira stayed at 115.7 through trading on Apr 12.

The slide has caused a crisis that threatens the heart of Obansanjo's macro-economic policies on which Nigeria depends for a debt rescheduling deal with foreign creditors.

Bankers who were expecting a clear policy decision on how to prop up the naira after a devaluation of 4.5 percent in two days said they left the meeting disappointed.

"The meeting was more of the government using moral persuasion to resolve the problem of the naira, which was not really caused by banks but by the poor production level of the economy," said a bank chief executive who was at the meeting.

"As long as the problems of poor power generation and supply is not taken care of, as long as the roads are still very bad, and cost of doing business in the country remain high, the naira will continue to lose value against other currencies," the chief executive said.

SPECULATIVE TRADING

Obansanjo told bankers to show "greater patriotism by refusing to engage in speculative trading" and assured them that the government had enough in its cash reserves of more than $9 billion to fund all legitimate demand, the statement said.

Despite his assurances, demand for foreign exchange continued to surge with $174.4 million traded within a few hours after the meeting.

Since Apr 10 volume in the forex market has been around $419 million, more than double the central bank's weekly average demand projections of $185 million.

Analysts say the root cause of the naira's problem was a major shift of policy which allowed state governments and corporations to bank with commercial banks rather than with the central bank. This had led to periodic liquidity problems the central bank had difficulty controlling.

The intermittent floods of budgetary allocations that enter the commercial banking system is compounding the liquidity problem at the heart of the naira.

State governors have been widely accused of misusing those deposits to buy hard currency to pay for imports and other obligations, which has added pressure to the naira.