Nigeria devalues naira by 8 pct to protect forex reserves during oil slump

By Julia Payne and Camillus Eboh ABUJA (Reuters) - Nigeria's central bank devalued the naira by 8 percent and raised interest rates sharply on Tuesday, as it sought to stem losses to its foreign reserves from defending the currency against weaker oil prices. The bank moved the naira's target band to 160-176 to the U.S. dollar, compared with 150-160 naira previously, owing to prolonged naira weakness and high dollar demand. The last time it devalued was in November 2011, when it lowered the band from 145-150 naira to the dollar. The bank also raised its benchmark interest rate by a hefty 100 basis points to 13 percent, the first change in the policy rate for more than two years. The naira has taken a beating over the past few months, as falling oil prices have shaken confidence in the assets of Africa's leading energy producer and biggest economy. Defending the devaluation, central bank Governor Godwin Emefiele said efforts to prop up the naira had led to "dwindling foreign reserves" and that a "more flexible exchange rate is the most viable option". "Falling oil prices have consistently reduced the accretion to external reserves, thus constraining the ability of the bank to continually defend the naira and sustain the stability of the naira exchange rate," Emefiele said. He forecast a sustained drop in the oil price, saying the government's benchmark oil price of $73 a barrel in its 2015 budget may be overoptimistic. The naira opened at a record low on Monday of 178.25 and the central bank sold dollars outside of its target band, giving an early signal of the devaluation to come. But its decision to raise interest rates as well on Tuesday took analysts by surprise. Philip Walker, economist at Economist Intelligence Unit in London predicted it could devalue again next year. "The fall in the oil price forced the hand of the central bank, but it is political and policy issues that will continue to negatively affect confidence in the naira. A further devaluation after the 2015 elections seems likely," he said. FALLING RESERVES Several emerging economies have seen their currencies fall due to hot money outflows this year, as the U.S. Federal Reserve tapered its stimulus programme, but currencies of economies sensitive to oil prices such as the naira and the Russian rouble have been hard hit. According to its website, Nigeria's central bank has spent an average of $27.9 million a day this year defending the naira, but the currency has still fallen 10 percent versus the dollar on concerns that a continuous slide in global oil prices would undermine efforts to prop up the currency. "The commencement of normalisation of monetary policy by the U.S. Federal Reserve ... (is) a development which has accentuated capital outflows," Emefiele said. Nigeria's foreign reserves stood at $36.5 billion on Tuesday, Emefiele later told an investors' conference call, down 18.3 percent from a year ago, after the central bank stepped up its defence of the currency. The amount was equal to seven months of import cover, he said. In a further tightening move on Tuesday, the central bank hiked banks' cash reserve ratio for private sector bank deposits to 20 percent, from 15 percent previously. Emefiele also said current low oil prices were an opportunity for the treasury to remove the fuel subsidy. In comments that sounded a little like his predecessor Lamido Sanusi, a government critic, Emefiele lamented a "considerable loss of fiscal space following from our inability to boost sufficient reserves during the boom days," a frequent complaint of the former governor. "We thought that there is a need to take a more pessimistic view," on oil prices in the budget, he later told the conference call. "We feel that there could be a sustained drop."