Analysts are reacting negatively to yesterday’s inaction by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) on moving the naira currency closer to equilibrium through a devaluation or increased exchange rate flexibility.
The MPC held the policy rate at 11 percent after lowering it from a record 13 percent in November, CBN governor, Godwin Emefiele told reporters on Tuesday in Abuja, the capital.
“The current episode of lower oil prices is expected to remain over a very long period,” Emefiele said. “Consequently, it is imperative to brace up for a longer period of low government revenues from oil sources which will necessitate hard and uncomfortable choices.”
The CBN has all but fixed the naira at N197-N199 per dollar since early March last year, a move that has hurt businesses and crimped growth prospects in Africa’s largest economy.
“In the absence of a more flexible FX regime, and changing external fundamentals, demand will need to contract in order to sustain the FX rate at a fixed level, c. 197, while avoiding any damaging run-down of FX reserves. The cost of the fixed exchange rate regime, in terms of growth forgone, is high. It is doubtful that it can be offset by increased domestic lending,” Razia Khan, chief economist, Africa, at Standard Chartered Bank, London, said in response to questions.
“The risk is (even with the best of intentions) that a widening spread with the parallel market will encourage round-tripping, creating further pressure on reserves.”
Commenting on the MPC decision, Bismarck Rewane, managing director/Chief Executive Officer of Financial Derivatives Company Limited, said the parallel market will go into over drive again.
According to Tajudeen Ibrahim, head of research, Chapel Hill Denham Securities Limited, the decisions of the MPC are broadly in line with market expectations, however the committee gave little or no clarity on FX policy, despite the misalignment between the official and parallel market exchange rates.
“We believe this is essential for improved market confidence. We could see further pressure on the FX rate at the parallel market on the back of this,” Ibrahim said.
The foreign exchange (FX) restrictions have led to a spike in the exchange rate in the black or unofficial markets to near N290 per dollar.
Nigeria’s foreign exchange reserves are down some 2 percent or $0.7 billion year to date, to $28.2 billion as at January 25 as oil prices fell below $30 per barrel, data from the CBN show.
“We expect further deviation between the official and parallel rates going forward, as more exchange rate users would continue to face restrictions due to the low dollar liquidity in the system. The equities market may also witness some sel-loff and consumer and investment spending would remain sub-optimal,” Ayodeji Ebo head of investment research at Afrinvest Securities Limited said.
“In the medium term, a devaluation is inevitable and the CBN governor did mention that the bank is currently fine-tuning its exchange rate policy to be more flexible, so maybe the much anticipated devaluation would come after that.”
The negative reactions come as investors had expected an announcement on FX liberalisation and the resumption of two-way trading, after comments by President Buhari in the December Budget speech, signalling a movement in that direction.
“Perhaps in light of the renewed pressure on oil prices, perhaps because of a willingness to let current stimulus measures run their course, there was no opting for FX market liberalisation at this meeting. Instead, financial institutions were asked to do their ‘patriotic duty’ and increase lending to the real economy,” Khan said.
“Nigeria will find it more difficult to preserve its FX reserves in the absence of FX market flexibility. There is little incentive for larger foreign inflows – whether direct investment or portfolio flows – to finance its current account deficit.
“Investors will likely remain on the sidelines, given the perceived overvaluation of the FX rate, and the still-significant risk of an eventual devaluation. Any further decline in Nigeria’s FX reserves may harm perceptions of its credit worthiness, at a time when Nigeria may need to borrow externally to finance ambitious infrastructure plans.”
PATRICK ATUANYA & HOPE MOSES-ASHIKE
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