How CBN’s demand management measures stabilise foreign exchange

The average naira exchange rate was relatively stable at the interbank segment, but significantly volatile in the BDC segment in June 2015. This was one of the highlights of the Monetary Policy Committee (MPC) meeting held last week July 24, 2015.

The exchange rate at the interbank market opened at N197.00/US$ and closed at N197.00/US$, with a daily average of N197.00/US$ between July 21 and July 23, 2015. The relatively stable exchange rate in the inter-bank segment can be attributed to the effects of some recent demand management measures introduced by the Central Bank of Nigeria (CBN). Coupled with the above is the blockage of leakages, an outcome of body language of presiden Muhammadu Buhari, who has sent out warning signals that his government would deal dwcisively with scourge of corruption and their perpretrators.

Consequently, the level of the nation’s foreign reserves had witnessed improvement in recent weeks, a development attested to by Godwin Emefiele, CBN governor.

Gross official reserves increased from US$28.57 billion at end-May 2015 to $31.53 billion as at July 22, 2015, reflecting the blockage of leakages as well as the bank’s management policies.

Emefiele, who chaired the Committee meeting noted that broad money supply (M2) declined by 0.61 per cent in June 2015, below the level at end-December 2014. The modest decline in money supply reflected the decreases in the net foreign assets of 16.15 per cent and other assets (net) of 21.40 per cent. Net domestic credit (NDC), however, grew by 13.45 per cent. Annualized, NDC grew by 27.90 per cent over the end-December 2014 level but essentially within the provisional benchmark of 29.30 per cent for fiscal 2015. The growth in aggregate credit was attributable to growth in Federal Government borrowing which reached 40.81 percent in June 2015.

During the period under review, money market interest rates were relatively volatile, owing to fluctuations in banking system liquidity. Average inter-bank call and OBB rates opened at 6.55 and 6.45 percent on 1st July, 2015 and closed at 26.51 and 21.00 per cent, respectively, on July 23, 2015. Average inter-bank call and OBB rates for the period were 9.83 and 10.23 per cent, respectively.

The Committee noted a bearish trend in the equities segment of the capital market during the review period. The All-Share Index (ASI) declined slightly by 1.66 per cent from 31,744.82 on March 31, 2015 to 31,216.72 on July 23, 2015. Similarly, Market Capitalization (MC) decreased by 0.37 per cent from N10.72 trillion to N10.68 trillion during the same period. Relative to end-December 2014, the market indices decreased by 9.9 and 6.9 per cent, respectively, the slight decline in share prices year-to-date was largely due to subdued sentiments preceding the general elections as well as the lingering effects of falling oil prices.

Overall, the Committee expressed optimism that business confidence would continue to improve as Government continues to unfold its economic plans. In addition, some of the reassuring measures of the administration including efforts aimed at resolving fiscal challenges at the sub-national levels, and the fight against corruption and improving the business environment would unlock the inflow of foreign direct investment. The Committee also underscored the imperative of growing and protecting the country’s foreign reserves and building fiscal buffers in the process of strengthening confidence in the economy which is essential for promoting growth and stability.

HOPE MOSES-ASHIKE