MPC minutes support claim of imminent FX policy review

Minutes from the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) meeting held on the 21st and 22nd of March 2016 which was released yesterday reveal some MPC members expressing concern about the negative impact of the current FX policy on the economy and urging a review in their personal statements.

Sarah Alade, CBN deputy governor, Economic Policy, and MPC member said foreign exchange scarcity is affecting economic activities and impacting growth.

“While the Central Bank is making all efforts to meet all legitimate foreign exchange demand, reduced inflow is making foreign exchange scarce. It is important for the Bank to implement policies that will encourage inflows and increase supply of foreign exchange to meet import demand and reduce Current Account Deficit (CAD) which has been widening. The lack of liquidity in the interbank market is fueling capital outflow and currency weaknesses outside the interbank market. These developments are having a dampening effect on growth. Under these uncertain conditions, monetary policy should be focused at restoring confidence in the domestic economy, increasing supply of foreign exchange, accretion to reserve and making all efforts to bring inflation to the target level,” Alade said.

Growth in Nigeria slowed to 2.8 percent last year, the weakest level since 1999 and down from 6.2 percent recorded in 2014.

Yahaya Shehu, another MPC member said the foreign currency market and the fixing of the naira exchange rate is posing some challenges that need to be addressed.

“It is necessary to develop a long term approach to the foreign exchange market, which obviously has an important effect on prices, foreign reserves, portfolio investment and FDI, and therefore, growth,” Shehu said.

For MPC member Balami Dahiru Hassan  there should be need for improvement of the efficiency and effectiveness in the allocation of credit, foreign exchange and securities.

“ A lot has been done on the demand side of foreign exchange; however, there is need to look at the supply side. The gap between the official and parallel market is a source of concern because for rational economic agents it encourages round tripping which is very devastating to the economy. The level of liquidity, growth, exchange rate and inflationary trend suggest that some policy changes be put in place to deal with some of the challenges affecting the economy,” Balami said.

The spread between the official and parallel market rate has widened since the last MPC meeting in March when the parallel market rate fluctuated between N300 and N315 as at March 23- 27 2015.

Abdul-Ganiyu Garba, a Professor of Economics at the Ahmadu Bello University said the MPC communiqué has given forward guidance about its commitment to forex market comprehensive strategy.

“It is clear from an evaluation of the over thirty three exchange and trade related administrative measures between June 2014 and January 2016 that the consistent shifting of demand pressures first from RDAS market to interbank, then from interbank to BDCs and finally from BDCs to the parallel market has been a strong factor in (i) the widening of the exchange rate spread and the attractiveness of the arbitrage opportunities and (ii) the growing importance of the parallel forex market which ought to have been kept so small that its noise value is greatly minimized as it was when the Wholesale Dutch Auction System (WDAS) was in operation,” Garba said.

The MPC members’ statements made even before the recent leg down in the value of the naira at the parallel market suggest that a review of the current policy would be top of the agenda at the next MPC meeting scheduled for next week on the 23rd and 24th.

PATRICK ATUANYA