As the Central Bank of Nigeria (CBN) concludes its ongoing meeting on the monetary policy today, some analysts say corresponding interbank trading activities with those of Bureaux De Change (BDC) would serve to reduce the volatility in the foreign exchange market, rising inflation and pressure on the naira.
The merger of the two segments of the market, in addition to the ongoing of blockage of leakages in the system and quick action by government on putting a cabinet in place for complementing fiscal policies would enhance the recent moves by the CBN to encourage local production and save the naira.
This is coming on the heels of expression of support for the CBN’s policies by some money operators.
The analysts believe that the development would reduce the current round-tripping occasioned by the widening gap of N44 as the official exchange rate stands at N197/$ as against N241/$ at BDC market as at yesterday.
“After a thorough assessment of Nigeria’s current macroeconomic environment, we have come to the conclusion that monetary policy alone lacks the efficacy to improve key macro indicators, as it will only delay the inevitable deterioration caused by the nation’s fiscal imbalance, except fundamental fiscal policies are put in place, says Essien Usoro head, research , Greenwich Trust Limited.
“In our opinion, a short term strategy for the MPC at its next meeting is to merge interbank trading activity with that of the Bureau De Change operators, by removing selective access or price determination at the interbank market, thereby eliminating the arbitrage opportunity in the BDC segment of the FX market, Usoro adds.
“It is however not unlikely that the apex bank will succumb to external and domestic pressures to adjust the exchange rate at the interbank, in order to bridge the current gap with the exchange rate in the parallel market; a move which we think will only postpone “the inevitable”, as the exchange rate in the parallel market will gradually trend southwards again once poached by speculators,” he further observes.
Bismarck Rewane, chief executive, Financial Derivatives Company limited, in a note last week said, “The MPC is facing the typical monetary policy trilemma of increasing inflation, currency pressures and interest rate stability. While a decrease in interest rates is politically expedient to stimulate economic growth, it may not be the appropriate move due to currency and inflationary pressures.
“The increased liquidity in the system from the bailout funds is another factor that the Central Bank of Nigeria (CBN) would have to consider. The CBN will be reluctant to increase interest rates as monetary policy tightening is almost reaching its upper limit.
Analysts argue that BDC operators are being spoonfed through the weekly allocations, a development that has continued to put pressure on the naira, due to connivance between the operators and deposit money banks.
They further contend that the MPC may be at a crossroads as regards either to reduce interest rates, which is politically expedient to stimulate economic growth, but with its adverse effects on currency and inflationary pressures, which will be aggravated by the liquidity from the bailout funds.
Also, they said the fact that monetary policy tightening measures have reached their upper limit might constrain the CBN from increasing interest rate, and that this might lead to an alternative use of its administrative tools such as cash reserve ratio (CRR) and Open Market Operations (OMO).
“The CBN could alternatively increase its use of administrative tools such as cash reserve ratio (CRR) and Open Market Operations (OMO). Even though the CBN is committed to defending the naira, the currency pressures facing Nigeria are becoming more intense.
“The spread between the interbank rate and the parallel market creates an arbitrage corridor for speculators, and is now a round tripper’s paradise. Another issue that is of concern is the consistent decline in oil receipts as a result of falling oil prices, when the sanctions on Iran are finally removed.”
Rewane further said that the June 0.2 percent increase in inflation to 9.2% from May’s 9.0% was expected, given the prolonged fuel scarcity and shortage of perishable farm produce, adding that it underscores the impact on consumer expectations and behaviour.
“The rising inflation is likely to be aberrational but the trend is becoming more consistent and is fueling the fear factor. Anticipated inflation is more important than historical inflation because it influences consumer behaviour and preferences. “Demand for goods will increase if people expect prices to rise in the near future. As demand increases, producers would be forced to increase prices up to a point that there is a struggle of bargaining power. Another threat to inflation is the possibility and timing of the subsidy removal, which is now becoming more inevitable,” he said.
However, Jibril Aku, managing director and chief executive, Ecobank Nigeria, has given his support to the forex restrictions on some items such as rice and largely non essential items by the CBN.
Aku, who commended the CBN governor for the relative stability in the market since the fall in oil price, said that the ban on 41 items from official forex market is excellent and justifiable.
John Omachonu
