MPC members defy short-term FX supply improvement

As the nation awaits the all important decision of the Monetary Policy Committee (MPC) meeting today, members say the likelihood of an improvement in foreign exchange supply in near-to-medium term is highly diminished, given that the driving force is permanent negative term of trade shock.

This was contained in the personal statement of members for the last MPC, which was released yesterday by the Central Bank of Nigeria (CBN).

“Apart from the effect of term of trade shocks on current account, available statistics show that the advanced countries’ currencies particularly the US dollar has appreciated against emerging countries’ currencies since the latter part of 2015 on the backlash of the commencement of monetary tightening by the US Federal Reserves,” Adelabu Adebayo, deputy governor, Corporate Services, said.

He said the current exchange rate framework is not compatible with the realities from the dynamic operating environment. It is therefore imperative to review the current framework to a model that permits a great deal of flexibility to accommodate shocks from the external environment.

In her statement, Sarah Alade, deputy governor, economic policy, said in the short to medium term monetary policy must ensure that the economic engine is not grinded to a halt and should be focused at resuscitating growth.

She said the current foreign exchange regime should be reviewed to ensure continuation of economic activities. Reduced inflow as a result of low oil prices is making foreign exchange scarce in the country. While the Central Bank is making all efforts to meet all legitimate foreign exchange demand, more should be done to ensure that economic activities are not grounded.

“I support the review of current foreign exchange management framework in the country to ensure continuation of economic activities. Policies that will encourage inflows and increase supply of foreign exchange to meet import demand should be encouraged and implemented”, Alade said.

According to her, the lack of flexibility in the interbank foreign exchange market is fuelling capital outflow and currency weaknesses outside the interbank market. These developments are having a dampening effect on growth and driving inflation. At this time, monetary policy should be focused on restoring confidence in the domestic economy and increasing supply of foreign exchange to attract inflows.