CBN vows FX convergence as rates kept on hold

…Warns naira speculators

…Retains MPR at 14%, CRR 22%

…Economy exiting recession – SMI data

Related News

The Central Bank of Nigeria (CBN) on Tuesday signalled its intention to continue with policies that have narrowed the spread between the interbank and black market naira-dollar rates as it kept its benchmark monetary policy rate (MPR) on hold and warned off currency speculators.
Nine out of ten members of the Monetary Policy Committee (MPC), voted to keep the MPR at 14 percent, the Cash Reserve Ratio (CRR) unchanged at 22.5 percent, Liquidity Ratio at 30 percent, as well as the asymmetric corridor around the MPR at +200 basis points and -500 basis points.
“The CBN is on the direction to converge rates as our foreign exchange (FX) policy programmes are on course,” CBN governor, Godwin Emefiele said at a news conference in Abuja, following the two days meeting of its MPC.
“Those on the side-lines are on the wrong side of the bet, we are strongly very optimistic that rates will converge further,” Emefiele said.
The naira traded as low as N520 per dollar earlier in the year on the unapproved black market but has firmed to as high as N420 per dollar as at March 21.
On the official interbank market the naira was quoted at N307.50 on Tuesday, some 27 percent stronger than at the parallel market.
Retaining rates at current levels was the most suitable option at this time, Emefiele said.
“While benefits of loosening at this time would be in line with the plans of the fiscal policy to restart growth, the MPC however notes that it will exacerbate inflationary pressure, worsen exchange rate and further pull the real interest rate into negative territory and may not necessarily transmit into lower retail lending,” Emefiele stated.
Inflation for February stood at 17.78 percent and though the country still remains mired in recession, Africa’s largest economy contracted at a slower pace in the fourth quarter of 2016, than in the previous quarter, according to data from the National Bureau of Statistics (NBS), raising hopes of a recovery in 2017.
Emefiele who was optimistic that the recently released Economic Growth Recovery Plan (EGRP) will help fast track growth, assured that the CBN would sustain its present serial interventions in the Foreign Exchange Market and warned that those taking a bet on the naira would lose “real big”.
The sustainability of the foreign exchange policy remains the major question mark around convergence, analysts said.
“The CBN’s interpretation of that FX flexibility (for now) appears to be a continuation of more frequent FX sales, aimed at achieving eventual convergence of Nigeria’s different FX rates,” Razia Khan, Africa Chief Economist at Standard Chartered said in response to questions.
“How sustainable the policy is will depend entirely on oil earnings, and whether it is possible to sustain confidence. The current policy leaves Nigeria vulnerable to any near term volatility in oil earnings, more vulnerable than it should be,” Khan said.
Nigeria has managed to grow its gross dollar reserves to above $30 billion as at March 9th on the back of higher oil prices and production which accounts for 90 percent of export earnings.
Other reasons for the growth in reserves include inflows from a recent $1 billion Eurobond sale and money from Developmental Finance Institutions (DFIs), according to Funso Sobande, a former chief dealer at the CBN.
“The FX interventions by the CBN are on the right track. Sustainability is now the issue. The adjusted reserve figures is closer to $24 bn or $25 bn when you back out some $4bn in FX futures sales,” Sobande said.
Kabir Okunlola, partner Audit- Financial Services, KPMG Professional Services, said convergence is the only way forward to reduce the speculative demands in the FX market which is the principal reason for the huge differential between the official rate and the parallel market.
“If we are able to achieve this, it will enhance supply of the currency to the market and also help organisations better manage their FX risks,” Okunlola said.
The naira was boosted on the black market this week, after the Central Bank of Nigeria offered another $180 million to meet bids for forwards.

Meanwhile, the March Sales Managers’ Index (SMI) data compiled by research institute, World Economics, suggests that the Nigerian economy is starting to grow out of the recession which saw 10 months of consecutive contraction.
SMIs provide the earliest monthly data on the speed and direction of economic activity in the fastest growing areas of the world: Africa, Asia and the America’s; and provide the most complete indication of growth, covering all private sector activity.
Nigeria’s Market Growth Index grew to 53.5 in March as the monthly Sales Growth Index edged up to 51.3, its highest value since March 2016.
“It is too early to speculate if the recovery is built on solid fundamentals for a sustained recovery but the changes reflected are not insubstantial,” World Economics stated in a monthly report published Tuesday.
Price inflation for March, which is tracked by the Prices Charged Index, remained high at 61.3 – and indicative that very high levels of inflation continue.
Overall, conditions in Nigeria have improved over the past month and managers are expressing optimism that the economy will continue to grow, the report said.
“If economic data continues to follow a positive path in the longer term and inflation cools then there is a possibility of the Central Bank cutting interest rates to stimulate growth,” FXTM Research Analyst Lukman Otunuga said.