The Central Bank of Nigeria (CBN) has released minutes of its Monetary Policy Committee (MPC) meeting held on July 23 and 24 which was attended by all 12 members.
BusinessDay’s analysis of statements of each MPC member shows that a majority are tilting towards greater flexibility in the exchange rate management regime of the CBN in the future.
“A major challenge to the current framework is the wide and unacceptable premium between the interbank and the bureau du change (BDC) rates. The premium should be narrowed, after which some flexibility could be introduced into the interbank market, possibly by widening the band,” Adelabu Adebayo, a deputy governor of the CBN said in his statement.
The naira has traded at near N199 per dollar on the interbank market since March 2015, however on the parallel market, it trades close to N220.
Sarah Alade, CBN deputy governor, Economic Policy, and MPC member, notes that: “In order to encourage capital inflows and improve macro-economic fundamentals, there is urgent need for a liquid, efficient and competitive foreign exchange market that will ultimately lead to improvement in resource allocation.”
Analysts in recent months had called for a loosening of the restrictions on naira trading by banks and more market approach to determining the exchange rate.
JPMorgan has also threatened to eject Nigeria from its EM bond index by year end, if liquidity in trading the naira does not improve.
Suleiman Barau, deputy governor, operations directorate, at the CBN, in his submissions says that depreciation of the exchange rate may not be beneficial to Nigeria’ economy in view of the inelastic nature of exports and imports.
“I would rather prefer a guided flexibility in the market, such as the widening of the band around the interbank rate,” Barau said.
Abdul-Ganiyu Garba, a professor of Economics at the Ahmadu Bello University, Zaria, notes that the malfunctioning of the forex market is a major constraint to monetary policy effectiveness.
“Clearly, the mechanism for allocating forex in Nigeria is not working and needs an urgent fix to restore efficiency, effectiveness, credibility, transparency and liquidity,” Garba said.
CBN data show that the spread (difference between official and BDC) widened from N2.7 (January 1, 2013) to (now the difference between interbank and BDC) N44 on July 21, 2015.
Stanley Lawson, a director at the CBN and MPC member, observes that the CBN’s attempts to strike a delicate balance between demand and price control in the FX market has failed.
“Since this has not yielded the desired result, the introduction of some flexibility around price may be advisable at this time. With this, I believe that some of the distortions that prevail in the market today, will begin to self-moderate,” Lawson said.
The CBN had tightened FX rules, as well placed a de facto ban on accessing of foreign exchange through the official channels by importers of 41 products, ranging from toothpicks to wheelbarrows and rice.
Joseph Nnanna, deputy governor, financial system stability at the CBN, in his statements notes that the demand pressure in the forex market remained strong, in spite of the strong demand management strategies introduced to encourage local substitution by excluding the funding of non-core imports.
“Perhaps a complimentary foreign exchange ‘supply’ management strategy may require the introduction of some ‘guided’ flexibility in the exchange management going forward,” Nnanna said.
Nigeria’s extreme dependence on oil which accounts for 95 percent of dollar earnings is a major source of the pressure on the FX market, as Brent crude prices trade near the $50 dollar mark, down some 50 percent in the past year.
Doyin Salami, a member of the MPC (macro-economic policy) and associate professor at the Lagos Business School, says the recent decision to deny foreign currency market access to 41 categories of imported items will crimp growth in the short-to-intermediate term.
“This leads me to support rational views that a greater degree of flexibility is needed to sustainably attend naira exchange rate management,” Salami said.
PATRICK ATUANYA
