•Interest rate now 13%
The battle to save the naira may have been lost, with the Central Bank of Nigeria (CBN) yesterday devaluing the currency.
The move is aimed at curtailing speculations against the currency, which has been battered by the relentless slide in the price of oil.
The CBN increased the benchmark interest rate to 13% from 12%. Nine of the 11 members of the Monetary Policy Committee (MPC) voted for the devaluation. The naria is now to trade at N168 to $1 from the previous N155.
“Although we had forecast some tightening, the Central Bank has exceeded expectations,” said Razia Khan, head of African macro research at Standard Chartered Bank in London.
“[It] has shown absolute commitment to dealing with current challenges [and] we think that these measures deal as comprehensively as possible with the challenges facing Nigeria,” she added.
CBN Governor Godwin Emefiele announced the decision at the end of the MPC meeting. The last time the interest rate was tinkered with was exactly two years ago.
Other new monetary policy measures the CBN announced include increasing the Cash Reserve Ratio (CRR) on private sector deposits by 500 basis points from 15 per cent to 20 per cent with immediate effect; widening the band around the midpoint by 200 basis points from +/-3 per cent to +/-5 per cent; retaining public sector CRR at its current level of 75 per cent; maintaining a symmetric corridor of +/- 200 basis points around the MPR; retaining public sector CRR at 75 per cent and retaining the foreign exchange trading position at one per cent.
Emefiele said the Committee believed that “a more flexible naira in the face of non- existent fiscal buffers was the most viable policy option at a time of heightened demand pressure for foreign exchange and falling oil prices”
The committee, he said, “was of the view that if it failed in taking the right policy actions now, the market would force the CBN to take more drastic actions in the future with far less foreign exchange reserves”.
Another reason for devaluing the naira, Emefiele pointed out, was the level of excess liquidity in the banking system. This development, he lamented, had made it imperative for the CBN “to address the sources of the foreign exchange demand pressure as a result, the Committee was of the opinion that the economy stood to gain by further tightening of monetary policy stance to anchor inflation expectations; and allowing some flexibility in the exchange rate to stem speculative activities and depletion of reserves.”
He said the CBN will confronts the issue of declining external reserves head-on in order to strengthen the value of the naira. Consequently, stabilising prices and maintaining exchange rate stability and charting a sustainable path for medium to long-term growth are the immediate top priorities.”
The CBN governor noted that the current economic challenges required bold policy moves on both the demand and supply sides of the foreign exchange market. “Consequently, bold policy and administrative measures in the management of the nation’s stock of foreign exchange reserves have become inevitable in order to align the market towards its long-run equilibrium path,” he said.
The Central Bank, he assured, “remains committed to a stable exchange rate within the limits of available resources and would continue to maintain sufficiently strong level of external reserves to meet its short term obligations and other regular balance of payments commitments”.
Emefiele stated that without prejudice to this commitment, Nigeria’s foreign exchange management framework “would have zero tolerance for infractions and would penalise economic agents whose primary objective is to speculate in the Nigerian market”.
With regards to the increased interest rate, Emefiele said the MPC was fully aware of the short run implications of a tight monetary policy stance on lending and growth, but that “available data indicates that banking system liquidity has been lavishly deployed in pursuit of speculative foreign exchange trading at the short-end of the market”.
The MPC, he said, remains fully committed to the goal of promoting inclusive growth through lower interest rates in the medium- to long-term, but banks as agents of financial intermediation have a critical role to play in the nation’s development process.
A banking system with an overly high profit motive the CBN governor said “negates the core tenets of banking and purpose of a banking license. However, under the circumstance, monetary policy he said “must be bold and emphatic on the goals macroeconomic management seeks to achieve and encourage the flow of credit along those lines.”
Asked why it took the CBN so long to adjust the interest rate, Emefiele said the apex bank was “looking at what the impact will be if we tighten the monetary policy rates, regarding rising interest rates and all other consequences on the people”. “We thought that leaving it the way it was then will allow us to monitor it while also using other means to tighten it.”
He added: “What we did was necessarily not to alter the rates of the CRR but what we did was that we operated through the Open Market Operation to tighten. We felt that having gone this far and we needed to continue to ensure that the cost of liquidity management is moderated, we needed to go through the means of tightening the CRR where the cost of the liquidity management would be reduced a little.”
The CBN governor also took a swipe at the recent decision to reduce the budgetary benchmark price for crude oil sales to $73, describing the benchmark price as “overly optimistic”.
According Emefiele, “available data shows that a number of six-month oil futures are currently signed at below US$70/barrel while improvements in technology have driven down the break-even cost of shale oil production to an average range of US$52-US$70 per barrel. In the light of this development, the Committee is of the view that the oil price benchmark of US$73/barrel proposed in the 2015 Federal Government budget may be overly optimistic, requiring considerable caution on the budget’s revenue projections.”
A weak public finance, he explained, “may impinge adversely on growth prospects as it shows up in reduction in critical public and private consumption and investment spending.”
The apex bank helmsman noted that the CBN was “not that optimistic that this drop will not continue, particularly given what is happening in the Middle East, the fact that, for instance, if Iran reaches a deal with the USA and the other stakeholders that they are negotiating ways to ensure that the supply of crude oil into the market will further increase, it will prick further reduction in crude prices and also have adverse consequence on the economy”.
“That is why the committee feels that we need to put it on notice that the $73 per barrel anchor benchmark for the budget is not pessimistic enough. I think there is need to be first pessimistic so that you protect your downside rather than being optimistic and leaving your downside open and when the risk eventually occur you found out that you have a problem.”
To defend its position, members of the Committee noted that “unlike in previous episodes, the current downturn in oil prices is not transitory but appears to be permanent; being a product of technological advancement. Currently, the USA which use to be Nigeria’s former major oil export destination now meets on average 80 per cent of its domestic oil demand from local shale oil retorting technology production and exports over 8 million barrels of crude oil daily.
The MPC also “found credence in the permanency theory of current oil price dynamics in the fact that the political restiveness in the Middle East and North Africa (MENA) region has not created uncertainty in oil supplies as both Libya and Iraq (Southern) have open and strong supply lines in the market. A nuclear deal with Iran could further complicate the situation, opening up the supply space for new oil supplies from Iran.”
In the Committee’s view, “the softening crude oil prices could provide necessary leverage for the fiscal authority to reduce budgetary outlays on fuel subsidy and channel such savings to growth enhancing sectors of the economy” in order words the CBN is tacitly in support of the reduction or withdrawal of subsidy on fuel as it currently stands.
On the impact of the European Central Bank (ECB) decisions on Nigerian market, the CBN governor said the view of the apex bank “is that no doubt different events in different parts of the world will naturally have its impacts on different economies”. “What we are concerned about at the moment is to ensure that we take measures that will effectively protect our economy and ensure that we are able to reasonably withstand those shocks when they arise.”
On what to expect in 2015, Emefiele said “fiscal measures have been introduced by the fiscal authorities. We will continue to monitor the situation. What I foresee is that the tightening measure would continue unless we see improvement in the global environment, particularly in the area of oil price where we appear to have some vulnerability. We would continue to monitor and what I am trying to say is that we will continue the resistance stance of tightening.”
