The predictions of most analysts concerning further policy tightening by the Monetary Policy Committee (MPC) in March may not come to fruition following the postponement of the general elections.
Attahiru Jega, chairman of Independent National Electoral Commission (INEC), had at a news conference on February 7, announced the postponement, by six weeks, of the general elections scheduled to hold between February 14 and 28.
The Central Bank of Nigeria’s (CBN) next policy meetings are on March 23 – 24, just four days before the rescheduled day for the election, and then May 18 – 19; although Godwin Emefiele, the CBN governor, can call an emergency meeting at any time when necessary.
Analysts’ view of the new development is that it will prolong the uncertainty in the polity with its attendant negative impact on the nation’s currency.
“With oil prices still languishing at low levels, resulting in minimal injections into the FX reserves, we expect the reserves to come under further pressure, perhaps dropping to about six months of import cover.
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“A further tightening of administrative controls is plausible, with fewer categories of demand eligible for Retail Dutch Auction System (RDAS) auctions. We expect spreads between Nigeria’s parallel and interbank FX rates to remain pressured, although an agreement by Nigeria’s Financial Markets Dealers’ Association limiting daily NGN depreciation in the interbank market to 2 percent will likely slow the pace of weakening,” Razia Khan, managing director, head – Africa Macro Global Research, Standard Chartered Bank.
The CBN has adopted a pragmatic approach to exchange rate and reserve management during this episode of weaker oil prices. The CBN tightened policy in November 2014, while simultaneously devaluing the official RDAS rate to more realistic levels (at the time).
Access to FX through the RDAS window was also limited in order to safeguard FX reserves. Perhaps, recognising that investor inflows ahead of an election were unlikely, the CBN did not tighten policy further at its January 2015 policy meeting. Nigeria’s well-behaved inflation trend, with CPI inflation still in single digits, and concerns over slowing growth may also have been factors behind that decision.
The election delay puts at risk our call for further policy tightening at the March MPC meeting, Khan said.
In her response on the last MPC, Khan said: “Whether we see further tightening of policy in March or beyond will depend on both FX moves and economic fundamentals. Recent FX weakness appears to be feeding into inflation with a considerable lag. Food prices have also played some stabilising role, offsetting price increases in other items. We would need to see evidence of a more significant inflationary threat for the authorities to tighten again.
“Post-election, if weaker oil prices are sustained for some time, the emphasis may shift very quickly to what is needed to support the performance of the real economy, creating some uncertainty around our call for further tightening. For the moment, the pace of passthrough of FX weakness into domestic prices is key to future monetary policy decisions.”
Analysts at WSTC had said: “We believe that the demand pressure in the FX market will be sustained by investors’ concern about sliding oil prices, low fiscal buffers and political uncertainties in the interim period after the general elections. Also, we believe that the firming US economy and expectations of higher interest rates in the US still present capital reversal risks. On the basis of these, and given the need to forestall further haemorrhaging of foreign reserves, we expect a further adjustment of the midpoint of the value of the naira by the CBN after the general elections. We reckon that this will both engender reserve accretion and also boost government earnings from crude oil in naira terms.”
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