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  • Dollar crashes to N380/$1 as MPC meets

    Dollar crashes to N380/$1 as MPC meets

    The dollar yesterday recorded its worst outing in more than three months against the naira, exchanging at N380/$1 in the parallel market. The rate comes ahead of tomorrow’s Central Bank of Nigeria (CBN) led Monetary Policy Committee (MPC) meeting in Abuja. The local currency was exchanging at N385/$1 on Friday and has maintained steady decline in the parallel market, in last one month.

    Also, at the official foreign exchange market, the CBN conducted its weekly Secondary Market Intervention Sales (SMIS) auction offering $100 million for spot and short tenored forwards as well as continued its daily Forex interventions in order to stabilize rates and improve dollar liquidity. As a result, rates at the interbank market appreciated from N304.60/$1 at the start of the week to settle at N304.45/$1 on Friday.

    The naira’s recovery against the dollar comes as currency speculators continued to lose grip of the market, given CBN’s consistent dollar injections into the interbank and other segments of the market.

    At this third meeting of the year, financial pundits expect the MPC committee members to keep interest rate unchanged at 14 per cent; hold on Cash Reserve Ratio at 22.5 per cent and retain of Liquidity Ratio at 30 per cent.

    The meeting is also expected to help the MPC review major developments in the global and domestic space, and consider way forward for the local economy.

    On the domestic front, there are a number of noticeable signals of a potential rebound in economic activities from the second quarter of this year. April’s Purchasing Managers’ Index (PMI) which settled at 51.1 points highlighted an improvement in overall business activity and reaffirmed that the economy is on its path to recovery. Also, there has been improvement in government finances occasioned by increase in domestic oil production as well as stability in global oil prices.

    Similarly, there has been significant improvement in the forex management which in turn has led to a remarkable improvement in forex liquidity and naira’s recovery. The CBN has continued special wholesale and retail interventions as well as the introduction of the SME window and Investors’ & Exporters’ Forex window in which transactions are executed at a market determined rate.

    Reacting, Managing Director, Afrinvest West Africa Limited, Ike Chioke, said analysis of the various interesting developments within the economy over the last two months suggests that the May MPC meeting of tomorrow and next is to “mark attendance” as we are of the view that the Committee would be likely satisfied with the recent traction the economy garnered.

    Whilst the MPC will likely be comfortable with rate convergence between the parallel market and official rates, the Committee  would reason the need to charge the CBN to revert to the recommendation on flexible foreign exchange framework which was approved since the May 2016 Meeting.

    He said the impact of the improvement in liquidity and management of foreign exchange has been evident in the performance of the equities market – which surged to a 10-month high of 28,873.44 points – as foreign investors have started returning to the market while domestic participation has also improved.

    “Whilst the recent downtrend in Headline inflation, especially the satisfactory moderation in core inflation from 18.1 per cent in December 2016 to 14.8 per cent in April-2017, could justify a rate cut, we are of the view that the MPC will resist this temptation as this may be premature. Also, reducing MPR at this time will not necessarily reduce the risk perception of the country more so that a higher rate environment would further dampen bank’s appetite towards real sector lending,” he said in an emailed report.

    Chioke said reducing Cash Reserves Ratio (CRR) defies monetary policy logic given the frequency of weekly Open Market Operation mop-ups at a significantly high cost. “The latest data show that as at March 2017, Commercial Banks’ Reserves with the CBN settled at N3.3 trillion with CRR at 22.5 per cent. If CRR is reduced by 2.5 per cent to 20 per cent for example, a total injection of N366 billion would be pumped into the system immediately. It will be therefore counter intuitive to reduce CRR that is at no cost to the CBN only to mop-up with OMO at expensive rate. On the flip side, our analysis completely rules out the possibility of a hike in CRR,” he said. Other analysts are of the view that the argument for maintaining status quo and consolidating on recent positives in the economy will be overriding at this May Meeting.

    “We believe the operations of the Forex market especially on the recent gains in forex administration will dominate the discourse. However, we do not think there would be a major shift in the current management of the forex market given the massive success and acceptance of the CBN’s policies. “We expect the CBN to continue to consolidate on these gains while sustaining its current momentum at the forex market; hence, we expect rates to remain stable this week,” they said.

  • MPC may hike interest rate to encourage savings

    The Monetary Policy Committee (MPC) yesterday opened its first meeting for the year in Abuja and will be making key announcements when the meeting ends this afternoon. Analysts at FBN Capital said the MPC could hike interest rate today in response to the surge in inflation, and need to encourage savings.

    The last time the committee hiked by 200 basis points to 14 per cent was in July last year, which was an unsuccessful bid to attract departed offshore portfolio investors.

    In an emailed report released yesterday, FBN Capital, an investment arm of FBN Holdings, said the committee was faced with an economy which has contracted year-on-year for three successive quarters and inflation which has accelerated for eleven months in a row on the same basis.

    It said:  “Gross Domestic Product (GDP) has gone into reverse due to the failure to diversify the economy and to the sabotage in the Niger Delta. Inflation has risen far above target due to supply-side factors. The MPC cannot be said to be the main culprit in either case although, along with the CBN, it has exchange-rate responsibilities and could have acted differently over the past 18 months.

    “The MPC and Central Bank of Nigeria are looking to the fiscal side to lift the economy out of recession. “The Federal Government has adopted an expansionary fiscal stance, which in our view is the right decision while it waits for its reforms to have a broad impact and oil revenues to recover.”

    Other analysts at Afrinvest West Africa Plc, believe the meeting will give MPC members the opportunity to take stock of the impacts of its tight policy regime and reflect on whether previously hiked interest rates helped inflation figures how responsive has portfolio capital been to the aggressive policy tightening which has resulted in a humped yield curve ostensibly guided to achieve positive short term real return.

    It was further predicted that the committee may not implement any major shift in the management of the foreign exchange market but would rather assess the impact of 2016 policies on the economy.

    Managing Director, Afrinvest West African Plc, Ike Chioke, said the MPC meeting is coming against the backdrop of tightening external market for trade and capital, underlined by the US Fed hike in interest rate last month and rise in fixed income yields, expected to subdue capital flows into emerging markets and developing countries this year.

    He explained that while the uncertainties surrounding the implementation of Brexit remains a concern, the emergence of Donald Trump as President of the US and the possibilities of heightened geopolitical tensions and trade wars linger as markets await a clear fiscal and trade policy from Trump.

    He said the challenges in the foreign exchange market persist as currency controls and forex rate peg continue to weigh on market liquidity whilst inflation has continued to rise largely as a result of the reforms in the energy sector and weaker exchange rate pass through on prices of imported goods.

    The CBN would likely find itself in an awkward situation where inflation rate is moderating (due to high-base effect) but inflation expectation remains high and capital importation is sub-optimal due to parallel market guided forex rate expectation and interbank market illiquidity.

    He thinks the approval of the Medium Term and Expenditure Framework and Fiscal Strategy Paper (MTEF/FSP) with exchange rate projection of N305/$1 suggests that the controls in the forex market will persist in the short-term. Thus, it is expected that rate at the official market to remain at similar level in the week ahead whilst the parallel market remains pressured.

    He said the fourth quarter 2016 Gross Domestic Product (GDP) data, due for release next month, is expected to show a further contraction in economic output dragged by below-trend oil production and weak productivity in the non-oil sector.

    “Despite the instability in macroeconomic variables, we do not expect a tweak in policy rates this week given the limited scope for easing or tightening and reluctance of the CBN to shift forex rate peg. However, subsequent meetings from March will be decisive as base-effect set in from February to moderate inflation rate, testing the resolve of the CBN to abide by the inflation-targeting thrust it committed to in 2016,” Chioke said.

  • MPC to hold rates

    MPC to hold rates

    •Talks on inflation, forex

    The Central Bank of Nigeria (CBN) moderated Monetary Policy Committee (MPC) will today and tomorrow be holding its sixth and last meeting for this year.

    It is to review major developments in the global and domestic space and make vital policy decisions.

    The MPC will be deciding on the domestic macroeconomic challenges – negative growth, constraining fiscal space, high inflation and foreign exchange (forex) scarcity  – that remain the major downside risk to Nigeria’s medium term economic performance.

    Analysts believe that the committee will likely hold all rates constant whilst reinstating the need for the CBN’s hierarchy to properly implement the currency market reforms to build market confidence.

    They insist that these key macroeconomic indicators have continued to show the sub-optimal performance of the economy and financial markets as seen in the persistent rise in prices which ensured inflation continued to gallop, rising by 48 basis points from 17.9 per cent in September to 18.3 per cent in October.

    Managing Director, Afrinvest West Africa Plc, Ike Chioke said the committee will maintain status quo as monetary policy has already reached its limit in stimulating investor confidence whilst focus has shifted to administrative measures preventing a fully functional forex market.

    “A higher rate environment would neither spur private capital inflow nor would a lower rate policy incentivize banks to increase their risk appetite in the credit market. The investment dilemma to foreign investors remains the current attractive yields in the market and the overhanging currency risks which might serve as a bottleneck in the repatriation of funds,” he said.

    “We believe that the forex market needs to be ‘truly liberalised’ not only in its operations but also in the demand and supply dynamics by rolling back capital control polices and reinstating transparent two-way quoting system for forex”.

    Ecobank Nigeria currencies analyst Olakunle Ezun said inflationary pressure had been subsiding in recent months due to seasonal effect of farm produce harvest, relatively stable forex rate at the CBN/Interbank market and stable energy and fuel costs.

    However, inflation expectation is to stay high in the short term as further adjustments to fuel prices and forex rate remain inevitable.

    Ezun said increases were recorded across almost all major divisions which contribute to the inflation figure. “Communication and restaurants and hotels recorded the slowest pace of growth in October, growing at 5.7 per cent and 9.4 per cent (year-on-year) respectively. The Food Index rose by 17.1 per cent (year-on-year) in October, up by 0.47 per cent points from 16.6 per cent recorded in September. During the month, all major food groups which contribute to the food sub-index increased with fruits recording the slowest pace of increase at 11.5 per cent,” he said.

    Chioke explained that since the last MPC meeting in September, the global risk landscape and policy outlook had changed dramatically, underlined by the emergence of Donald Trump as the President-elect of the United States and the resultant shockwave in the global bonds market, risk-on appetite in the US and underperformance of emerging markets assets.

    “Global fund managers have interpreted Trump’s victory to imply a domestic pro-growth and expansionary fiscal policy agenda in the US and high probability of lower trade relations with emerging markets,” he said.

  • Between MPC’s decision and currency market reforms

    Between MPC’s decision and currency market reforms

    The Monetary Policy Committee (MPC) has held its fifth meeting for the year. The conclusions were in line with analysts’ projections. The committee maintained the status quo, reiterating the need to fully implement currency market reforms to regain credibility and push for fiscal monetary policy co-ordination in structural reforms. COLLINS NWEZE writes on what this decision means for the economy.

    It is no longer news that the Central Bank of Nigeria (CBN)-controlled Monetary Policy Committee (MPC) agreed to maintain the status quo at its fifth meeting for the year, against calls from fiscal authorities for interest rate cut.

    Besides, the committee assessed the challenges facing the economy and the limitations of monetary policy in tackling the headwinds. It further decided to allow reforms that have been implemented, especially in foreign exchange market.

    Consequently, the 10 members voted to retain the Monetary Policy Rate (MPR), which is the benchmark interest rate, at 14 per cent; the Cash Reserve Ratio at 22.5 per cent; and the liquidity ratio at 30 per cent, among others.

    Reacting to the decision, Managing Director, Afrinvest West Africa Limited, Ike Chioke, said the MPC decisions were positive for the economy and the financial market.

    “We think the MPC’s decision was clearly a balancing act, as hiking rates further would have done little to thwart inflationary pressures, which remain largely structurally driven, while easing rates in response to political pressures would have communicated policy inconsistency and worsen capital account position. The CBN has further demonstrated its commitment to the policy tightening stance by aggressively mopping up liquidity in the financial system via Open Market Operation auctions at rates similar to previous auctions,” he said in an emailed report.

    He added: “We believe that the decision of the MPC to maintain policy consistency and resist political pressures to cut rates will reinforce the independence of the CBN, which has come under scrutiny over the last few months, while also emphasising priority policy objectives necessary for businesses and markets to reasonably form expectations. In the medium term, we think it is also positive for financial assets as capital inflows are returning, albeit tepidly, to the market.”

    Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, said the MPC acted to control inflation and save foreign reserves from further depletion.

    His words: “The fiscalists were strongly of the view that interest rates should be reduced as a stimulus for economic recovery. They were mostly disappointed with the status quo outcome. In addition, in recessionary times, a contraction (increase in rates) could have worsened a bad situation. Therefore, a middle-ground position of neutrality can be considered as an accommodative stance by default,” he said.

    Former CBN Governor and Emir of Kano, Muhammadu Sanusi II, backed the MPC decision, saying it acted well and courageously by not following the advice of the Finance Minister, Mrs Kemi Adeosun, who called for rate cut to stimulate the economy.

    The MPC, which is the highest policy making body of the CBN, chose to retain the policy rate in a unanimous vote by members. Sanusi said he supported the MPC’s decision on the grounds that it underpinned the autonomy of the apex bank. In a reaction, he said he was actually worried about the Finance Minister’s position and was also afraid that the apex bank might succumb to the minister, but that he was greatly relieved when the apex bank’s decision was announced. He said: “It is a positive thing. I was concerned that CBN would succumb. Because they did not, it means they have started being independent.”

    Sanusi, who made the remarks at the launch of Afrinvest Nigerian Banking Reports, 2016, explained that if the MPR was lowered even by 200 base points, it would not increase credit from banks to the economy as envisaged because of other constraining factors.

    On the other hand, he noted, a lower MPR would imply lower yields on money market instruments, which would be a disincentive to investments in the money markets, especially in the fixed income security segment and ultimately put a restraint on foreign portfolio investment inflows. He also stated that a lower MPR would fuel inflation further, which was already high.

    Also, former Executive Director, Keystone Bank Limited, Richard Obire, said the central bank of every country should be independent because foreign investors look at the monetary policy of the central bank in making investment decisions.

    “It is part of investors’ confidence to see that the CBN has substantial autonomy. If the independence of the CBN is threatened, it will send the wrong signal to the investment community. It would indicate that monetary policy is dictated by those close to government. However, people can voice their opinions on whether the interest rate is high or low, but cannot force the hand of the CBN on what decision to take,” he said.

    According to Obire, interest rate in Nigeria is in reality, high. He added that interest rate is the price that consumers of money pay. “Consumers of money are those who borrow for industrial consumption to buy equipment, land and other production materials to sustain productive activities within the economy,” he said.

    “If the interest rate is too high, as in Nigeria, then productive agents will not be able to produce. But when inflation rises, as in the case of Nigeria, the CBN will raise the price of accessing money to moderate the inflation pressure,” he explained.

    He said the government should give priority to agriculture and domestic production loans, with such loans accessed at single interest rate while luxury goods should get loans at market prices.

    “In every economy, there are borrowers and savers. I think the CBN is also trying to ensure that there is incentive for savers. By raising interest rate, the CBN wants interest rate to be positive for savers,” he said.

    The rise in inflation rate, Obire said, was caused by the devaluation of the naira, impact of fuel price hike, electricity, diesel, among others. It has, however, made more money available to government, which should be spent to reflate the economy.

     

    Global Market Review and Outlook

    Monetary policy decisions by key central banks were the major highlights of the week. The US Federal Open Market Committee (FOMC) held its sixth meeting for the year and elected to keep the Fed Fund rate unchanged despite speculations of a possible hike.

    Likewise other policy makers across regions – South African Reserve Bank Monetary Policy Committee, Nigerian Monetary Policy Committee and the Bank of Japan (BoJ) all kept their respective rates unchanged. Ahead of the OPEC meeting scheduled for next week, the debate between Saudi Arabia and Iran with regards to a cap on production lingers.

     

    Naira/foreign reserves

    The naira last week, hit a new record low of N436 against the dollar at parallel market, as dollar shortages persist in the economy.

    The development came amid depleting external reserves, which stood at $24.8 billion from $25.78 billion as of August 16, representing 2.11 per cent plunge from a month ago, data from the CBN data showed.

    The reserves position is expected to provide about five months import cover for the country.  Previous data on the reserves showed that they increased marginally by $40 million in March on a 30-day moving average basis to $27.9 billion and have continued to record marginal decline till current position.

    The reserves were also at $28.33 billion at end-June 2015, compared with $34.24 billion at end-December 2014, representing a decrease of 17.3 per cent decline.

    The fall in reserves was due to the sharp decline in foreign exchange inflow from in the economy due to continuous decline in prices of crude oil in the international markets.

  • MPC’s interest rate hike vs N6.06tr budget

    MPC’s interest rate hike vs N6.06tr budget

    Central Bank of Nigeria (CBN)-led Monetary Policy Committee’s (MPC’s) decision to raise interest rate from 11  to 12 per cent could limit the impact of the N6.06 trillion 2016 budget on the economy. The hike would raise the cost of private sector borrowing from banks at a time the N6.06 trillion 2016 budget is expected to trigger robust business activities in the economy, writes COLLINS NWEZE

    Last week’s passage of the 2016 budget was swift, but sudden. The previous haggles between the executive and the National Assembly over inconsistencies in the budget figures fizzled out and the budget was passed seamlessly. It happened the same week the Central Bank of Nigeria (CBN)-led Monetary Policy Committee (MPC) raised benchmark interest rate from 11 to 12 per cent.

    The committee said it appraised the international and domestic economic and financial environments in the first two months of 2016 as well as the outlook for the rest of the year before arriving at that decision.

    An economist, Henry Boyo, said the passage of the budget and hike in interest rate almost simultaneously could educe the benefits meant to be derived from the budget passage.

    He said the MPC is expected to be managing the liquidity in the system, including ensuring that inflation is put under check.

    Boyo says he does not expect much difference in the implementation of the budget from the previous ones and wondered if the allegation of ‘budget padding’ has been resolved. “I knew that the Ministries, Departments and Agencies (MDAs) were sent to reconcile the budget but not much information was released afterwards,” he said.

    Former Executive Director, Keystone Bank Limited, Richard Obire said raising the interest rate means the price of money will be higher. He urged government to spend locally, to ensure that major sectors of the economy benefit from the budget implementation.

    He applauded the government’s priorities of diversifying the economy away from oil, developing agriculture, exploiting the solid minerals and creating millions of jobs for the youths. But he added that achieving these priorities would need ready-capital and substantial local and foreign investments.

    He said the government is expected to generate enough liquidity to fund it and also see that a large part of it is used in bridging the infrastructure gap in the country.  Most roads, railways and power facilities are either in disrepair, half-built or with a capacity that is far below the needs.

    Obire insisted the Finance Ministry function has to do with being able to raise revenues to match the spending needs of government. For him, the finance ministry job, focuses on being able to understand what the government wants to do and translating it to financial numbers.

    The former bank chief said the Federal Government is working on achieving a reflationary budget, one that puts more money into infrastructure development. But he believes it will be challenging for government because it will want to spend in the context of revenue that has dropped because of low oil prices.

    He said government can drive revenue streams through effective tax regime, and increased earnings from the Customs Service. He said government has to be prudent in its spending, ensuring that  every naira  spent, comes with maximum value.

    Obire called for a high level of co-ordination between the Finance Ministry and the CBN. “There should be good handshake between both parties. This will enable them to tackle inflation and improve the value of the naira,” he said.

    Muda Yusuf, an economist and private sector advocate said given the size of the budget and the reflationary character, I believe it will have a stimulating effect on the economy. “This is what the economy needs at this time, against the backdrop of the economic slowdown.  Gross Domestic Product growth rate has dropped to 2.1 per cent, from about four per cent a year ago,” he said.

    He said the budget also gives priority to infrastructure as well as security. “This is a step in the right direction given the high infrastructure deficit that we have in the economy and having regard to the security issues we are grappling with in parts of the country. This emphasis is therefore commendable,” he said.

    He, however, said the debt service provision of N1.5 trillion is however of serious concern. “It shows that we are operating a debt profile that is not sustainable. This amount is about 35 per cent of revenue, which has already exceeded the global threshold for debt sustainability,” he said.The economist also called for an appropriate economic policy framework that could inspire investors’ confidence.  Private capital is crucial to the progress and diversification of the economy.  “Only the right mix of policies would make this happen.  There is a need to urgently address the current policy shortcomings in the foreign exchange management; undertake urgent reforms in the petroleum downstream sector; review existing trade policies and promote investment friendly tax policy,” he said.

    Managing Director, Financial Derivatives Company (FDC) Limited, Bismarck Rewane said the passage of N6.06 trillion 2016 budget by the National Assembly is expected to raise the volume of dollar demand in the economy.

    His note in the FDC Bi-Monthly Economic Report for March released yesterday indicated that the increase in the Monetary Policy Rate (MPR) will reduce liquidity in the system and demand for dollars in the short term.

  • MPC member urges CBN to devalue naira

    MPC member urges CBN to devalue naira

    A member of the Monetary Policy Committee (MPC), Adedoyin Salami, has advised the Central Bank of Nigeria (CBN) to devalue the naira.

    According to the minutes of the MPC released yesterday, he argued that the naira should be devalued and allowed to trade within a band, saying the fixed exchange rate would not work alongside a planned rise in government borrowing.

    According to the minutes of the 12-member MPC January meeting, Salami said the naira was 10 per cent over-valued and voted to move the exchange rate band to plus or minus five per cent from N220. The naira trades some 40 per cent below the official rate on the black market against the dollar.

    But Salami’s proposal gained no support at the meeting while the CBN was focused on exchange rate stability at the expense of inflation.

    Nigeria faces its worst economic crisis for decades as the falling prices of oil has slashed revenues, prompting the CBN to peg the currency and introduce measures to conserve foreign exchange reserves which has fallen to more than 11-year low.

    “The absence of an exchange rate management policy has diminished Nigeria’s attractiveness as a destination for international capital flows,” he said.

    Other policymakers voiced concerns that tight liquidity in the currency market could threaten economic growth this year as businesses struggle to get dollars for imports. They all voted to keep benchmark interest rate at 11 per cent in January.

    The CBN last year pegged its exchange rate to curb speculative demand for the dollar and conserve its dwindling foreign reserves after it restricted access to hard currency for imports of certain items, frustrating businesses.

    Last month, the International Monetary Fund (IMF) urged Nigeria to lift the measures imposed by the central bank last year and allow the naira reflect “market forces” more closely, as the restrictions had significantly affected the private sector.

    However, President Muhammadu Buhari has rejected calls by the IMF to lift foreign exchange restrictions and allow a more flexible rate for the naira in support of the apex bank’s actions.

    The tight controls have forced domestic lenders to delay hard currency loan and trade repayments to foreign banks and increased the risk of default, bankers say. Nigeria wants to borrow up to $5 billion to fund its 2016 budget deficit but the minutes showed that all 12 committee members warned that spending should not increase after the loss of vital oil revenues to curb inflation and enhance debt ratios.

  • MPC regrets cut in Cash Reserve Requirement

    MPC regrets cut in Cash Reserve Requirement

    The Central Bank of Nigeria (CBN)-led Monetary Policy Committee (MPC), said it  the decision reduce banks’ cash reserve requirement (CRR)  from 31 per cent to 25 per cent.

    A report from FBN Quest, a research and investement arm of FBN Holdings, explained that the message from the latest personal statements of MPC members on the policy shift, has only benefited borrowers in sectors with low employment elasticity.

    It therefore instructed the CBN management to devise regulations and measures to ensure that subsequent cut in the CRR of five percentage points (to 20 per cent) reached employment generating sectors, such as agriculture, infrastructure, solid minerals and industries. The CRR is a portion of banks’ deposit kept with the CBN as reserves.

    However, the MPC team said the monetary policy in Nigeria was successful in delivering macro-economic stability until about the third quarter of 2014,  although its impact on job creation was negligible. It was then undermined by the latest global headwinds, principally the collapse in the oil prices in the international market.

    “One member noted that the prime lending rate stood at about 17 per cent and the retail rate for Small and Medium Enterprises (SMEs) at 27 per cent. Since he estimated the internal rate of return for large and small businesses at 20 per cent and 15 per cent respectively, it is evident why borrowers are struggling. He also cited data showing that private-sector credit extension had expanded by only 3.5 per cent year-to-dated by end-October and therefore far short of the target for the year of 26 per cent,” it said.

    The MPC said the consensus therefore argues for cuts in the monetary policy rate (MPR) and the CRR to reverse a trend decline in gross domestic product (GDP) growth.

    One member notes that more than 50 per cent of banks’ deposits mobilised were not available for intermediation/on-lending before the latest reduction in the CRR.

    The consensus of statements made the reduction in the CRR “conditional”. “The statements use different formulae to express a similar message. One refers to aggressive quantitative easing, a second calls for targeted lending and two more advocate the deployment of unconventional monetary policy tools. Another envisages a rebate mechanism whereby the commercial banks appear to benefit from the reduction in the CRR after they have disbursed to favoured sectors,” it said.

    Also, a dissenting voice quotes figures in the CBN’s banking stability report showing that gross lending increased by just N39 billion after the net injection of about N400 billion resulting from the cut in the CRR in September.

    Meanwhile, the next MPC meeting is in two weeks, at a time when there are mixed signals on the direction of monetary policy in Nigeria. The CBN is expected to announce a new forex policy which will give it the flexibility to bring the external and domestic economic variables into equilibrium. This may include the announcement of a new exchange rate band, with a floor of N185 and a ceiling of N220 during the first quarter.

     

  • MPC’s good intention

    MPC’s good intention

    •There is more to rates in an uncertain economy

    Last week, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) voted to slash both the Minimum Rediscount Rate (MRR) and the Cash Reserve Requirement (CRR). The MRR – the industry’s reference lending rate was slashed from 13 to 11 percent; similarly, the CRR – the percentage of the total deposits required by lenders to hold in reserves with the central bank – was slashed from 25 to 20 percent.

    In arriving at the decisions, the CBN governor said that the MPC took into consideration, “the weakening fundamentals of the economy”, particularly the plague of low output growth, soft oil prices, low credit to the high employment elastic sectors of the economy, and sustained inflationary pressure.”

    The reduction in the CRR to 20 per cent, the MPC avers will “only be released to the banks that are willing to channel it to employment generating activities in the economy such as agriculture, infrastructure development, solid minerals and industry”, and the two percent reduction in MRR expected to make lending cheaper and hence more attractive, obviously stem from the same basic premise that the credit segment of the economy needs some sort of stimulant. Both have as their shared objective, the need to provide fresh impetus to wealth creation.

    We of course understand that there is no such thing as a magic bullet given the complexity of our economic problems. What is important is the degree to which the measures outlined can be said to be relevant to the problem. In the specific instance, we daresay that the move to lower the MRR chimes in with our citizens’ long overdue expectations of lower interest rate regimes. In the same vein, we see the reduction in the MRR – a measure projected to boost the stock of loan-able cash by N350 billion – as sound. This is perhaps better appreciated in the context of the newly introduced Treasury Single Account (TSA) policy under which Federal Government funds were pooled into the apex bank’s vaults – a development that has sent the banking sector reeling in illiquidity ever since.

    Our fears about the overall efficacy of the measures of course derive from the world of difference between the express statements of policy and final outcomes. It is, after all, a notorious fact that interest rates have largely operated way above what would seem reasonable by any standard – sometimes as high as 25 percent; and this is despite the retention of the MPR at 13 percent in the last six years. Where is the evidence that things would be different this time with MRR brought down by a mere two percent? Will it not be the same market in which the lender solely dictated the rule? In a world where ruling rates are sometimes as low as three percent, would the MPC regard the modest reduction of two percent on Nigeria’s ruling rate as competitive – or the best offer?

    Coincidentally, the MPC did not say anything about the structure of deposits – which reflects the lingering problem of prevalence of short-term as against long-term funds said to preclude the much sought-after long-term financing. More curiously, it was silent on the astronomic costs of doing business of which the financial sector is as much its victim as other players of the economy.  And so it bears asking: where is the guarantee that the cost of funds will not continue to rise in tandem with costs? And where is the evidence that a vault filled with cash will necessarily translate to a higher propensity by banks to lend to productive sectors?

    We do not seek to paint a doomsday scenario; rather, what we seek to do is highlight some of the more visible constraints to enable policy implementers appreciate and possibly address them. Agreed, there is a lot that the monetary authorities can do to improve the climate for doing business. But then, it has long been said that these work best when matched with appropriate fiscal policies. To the extent that the country’s loftiest ambitions for development are inevitably constrained by the yawning infrastructure gaps, what we expect to see is the hunger on the part of the Federal Government, on such a scale that can match the scale of deficit in infrastructure. We see that as the surest path out of the current economic doldrums. At the moment, we are yet to see the evidence of that hunger.

     

  • MPC members flay CBN’s forex policy

    The Central Bank of Nigeria (CBN) has come under attack for attempting to prop up the naira by restricting access to dollars. Two members of the Monetary Policy Committee criticized the policy; others said CBN should allow a more flexible exchange rate.

    Bloomberg quoted Chibuike Uche as questioning the legality of the CBN’s June decision to stop importers of about 40 items, including rice, furniture and toothpicks, accessing official foreign exchange markets.

    Doyin Salami said the measure would slow economic growth and that foreign investors were confused by the central bank’s attempts to defend the naira since March.

    Investors are “baffled by the CBN’s expressed unwillingness to countenance any further currency adjustments and market liberalisations,”

    Salami, a lecturer at Lagos Business School, said at an MPC meeting attended by all 12 members on July 23 and 24, according to a statement published on CBN’s website that: “The credibility that CBN has carefully cultivated, if not lost, is most certainly undermined,” he said.

    The naira plummeted by 21 percent to a record low of $206.32 between the end of June and February 12 as the price of oil crashed.

    CBN Governor Godwin Emefiele  introduced bans on purchases of dollars to stem the rout. The currency has since been mostly flat in the interbank market, averaging 198.94 since the end of February.

    But there are many stakeholders who insist that the CBN’s forex restrictions are in order.

    Former Executive Director, Keystone Bank, Richard Obire, said the policy is expected to encourage importers to look inwards and begin local production as the prices of the affected items would shoot up in the market because of high cost of buying forex from the black market.

    He said in the long run, the benefits of the CBN’s decision, will outweigh whatever temporary pains it may have. “Those who decided to produce those goods locally and export them,will earn foreign exchange instead of depleting the reserves. In the short-to-medium terms, it will be painful but subsequently, it will improve the overall economy,” he said.

    He said even the International Monetary Fund (IMF) believes that the CBN should protect the reserves because of the huge benefits of such decisions on the naira.

    “If the CBN keeps funding these items, the demand for the dollar will rise and this will affect its push for infrastructural development needed to boost the real sector,” he said.

    He said the policy could be used to achieve developmental objective, adding that using the available capacity to produce locally, would reduce forex demand and when the local production is enhanced, more people will find jobs within the economy.

    Former President, Chartered Institute of Bankers of Nigeria (CIBN), Mazi Okechukwu Unegbu said the policy was meant to fix the battered foreign reserves. He, however, insisted that the some items in the list, have no business being there because they are raw materials.

     

     

     

     

    “I have nothing against the policy, but the CBN must be cautious not to drive manufacturers to the parallel market. I expect the regulator to be one step ahead of the stakeholders,” he said.

    “The CBN should always consider the unintended consequences of its actions and must set a band which the naira must not exceed”.

    Unegbu said it is not right to formulate policies simply to attract foreign investors, because if the investment climate is conducive, they will come without being persuaded.

     

  • Naira, falling oil price, top agenda as MPC meets

    The Monetary Policy Committee (MPC) meeting which begins today will focus on measures that would strengthen the naira, especially in the face of declining oil price, analysts have said.

    In the last six months, crude oil price has plumetted to about $45 per barrel from $100, with its backlash already taking a toll on the local currency as well as the 2015 budget.

    Managing Director, Financial Derivatives Company Limited, Bismarck Rewane said the Central Bank of Nigeria (CBN) is likely to consider further depreciation of the naira if the oil price slump persists.

    “The hawkish monetary policy stance of the MPC is therefore not expected to change at today’s meeting. However, the monetary authority will be careful since further tightening may be detrimental as the general election is less than three weeks from the scheduled January MPC meeting. Meanwhile, administrative tools will continue to be used to support the monetary policy,” he said.

    Continuing, Rewane said the status quo is likely to be maintained at the meeting. “However, threats from increased political spending, growth in money supply, liquidity overhang in the banking system, continued decline in global oil prices, external reserves depletion and a sustained pressure on the naira are underlining threats to consumer price,” he said.

    The committee had at the MPC meeting of November 25, moved the midpoint of the official window of the foreign exchange market from N155/dollar to N168/dollar.

    It also widened the band around the midpoint by 200 basis points from plus or minus three per cent to plus or minus five per cent.

    The committee also increased the Monetary Policy Rate (MPR), the base lending rate, by 100 basis points from 12 to 13 per cent while the Cash Reserve Ratio (CRR) on private sector deposits also rose by 500 basis points from 15 per cent to 20 per cent. It also retained public sector CRR at its current level of 75 per cent. The CRR is a portion of banks’ deposits kept with the CBN.

    Analysts said the fall in oil production has created pressure on the public finances, leading to the federal government’s submission of a budget amendment to the National Assembly. “Given this analysis and the modest decrease in official reserves to just below $34.6 billion, the committee is unlikely to trim either the policy rate or the CRR for fear of the impact on the naira exchange rate,” they said.

    They attributed the drop in reserves partly to the exit of some offshore portfolio investors after Bernanke’s remarks adding that the position warrants caution from the MPC. “The committee’s view is that the exchange rate has more impact on inflation than interest rates. We would be surprised, therefore, if it was to jeopardise its impressive record on single-digit inflation,” they said.