Nigeria's central bank maintained its Monetary Policy Rate (MPR) at 12 percent but raised the cash reserve requirement (CRR) on public sector deposits by a further 25 basis points to 75 percent to tighten monetary conditions and support the naira's exchange rate.
The Central Bank of Nigeria (CBN), which has held its policy rate steady since October 2011, voiced its concern over the continuous fall in revenue from oil and a depletion of reserves, saying this was "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 need to sustain confidence and preserve the value of the naira," said the CBN, which has often called attention to the damaging effect of oil theft.
Nigeria's gross external reserves fell by 2.23 percent, or $980 million, to US$ 42.85 billion at the end of 2013 from end-2012 due to a slowdown in portfolio and direct investment inflows in the fourth quarter, resulting in a higher cost to the CBN of stabilizing the naira.
The central bank attributed a reduction in portfolio inflows to the start of the U.S. Federal Reserve's tapering of quantitative easing, concern over the naming of a new central bank governor and continued depletion of the Excess Crude Account (ECA).
"The reduction of the US stimulus especially, could in addition, trigger capital flow reversals and put greater pressure on the naira exchange rate," the CBN said.
Nigeria's ECA - a government account that was set up in 2004 to save oil revenues and provide a buffer against lower-than-projected oil prices on budgets - fell to $2.5 billion as of Jan. 17 from $11.5 billion in December 2012.
The central bank spent some $26.6 billion to support the naira last year, according to local press reports, with the naira falling by 2.3 percent against the U.S. dollar on the inter-bank market against the U.S. dollar, trading at 159.90 today. But on the bureau de change (BDC) segment of the market, the naira was quoted at 172 to the dollar, a depreciation of 7.8 percent.
The central bank said its policy committee had considered allowing a further depreciation of the naira currency to avoid further policy tightening and depletion of reserves but decided that "the cost of a weaker naira far outweigh the benefits to the Nigerian economy and the core mandate of the CBN," and thus re-affirmed its commitment to a stable exchange rate.
"Furthermore, having looked at all the options, the Committee decided against excessive reliance on external reserves to supper the exchange rate and opted for monetary tightening until fiscal buffers are rebuilt," the CBN said.
While all members of the monetary policy committee voted to raise the CRR on public sector deposits, three members voted to raise the CRR on private sector deposits to 15 percent from 12 percent while five voted to retain it.
Helped by the relatively stable exchange rate and tight policy stance, Nigeria's inflation rate remained in single digits throughout 2013 - the first time since 2007 - with inflation ending the year at 8.0 percent in December, marginally up from November's 7.9 percent but down from a year high of 9.5 percent in February.
The central bank, which had targeted inflation of 6-9 percent in the second half of 2013, said it took note of the pressure on core inflation and said this could be due to the widening spread between the official and BDC exchange rates.
"In order to head off the specter of rising inflation in 2014, concrete actions will be needed to stabilize the currency and minimize the divergence between the two segments of the foreign exchange market," the CBN said.
Nigeria's Gross Domestic Product is estimated to have risen by an annual rate of 7.67 percent in the fourth quarter, up from 6.81 percent in the second quarter, with the growth rate for fiscal 2013 estimated at 6.87 percent, up from 6.58 percent in 2012.