As members of the Monetary Policy Committee (MPC) begin the first meeting of the year today, on the expectation of the retention of the monetary policy rate (MPR) at 12 percent, analysts say that the widening gap between the parallel and official rates of the naira, as well as dwindling foreign reserves, would top discussions.
Some analysts who spoke with BusinessDay at the weekend said that the arbitrage opportunity of up to N20 between the official and parallel market rates and dwindling external reserves, currently at $43.29bn, among others, are putting speculative pressure on the naira, which apart from the retention of tight monetary stance should attract other measures.
Failure by the Sanusi Lamido Sanusi led committee to take some remedial measures, such as further increment in the cash reserves requirement (CRR) to between 75 and 100 percent, and increased supervision, would lead to the devaluation of the naira.
“In the next MPC meeting, Afrinvest Research expects the CBN to come up with policies that will curtail the protracted high premium at the BDC segment of the forex market. Concerning the “ingenius banks”, increased supervision by the CBN is required to track utilisation of the dollars purchased and erring banks should be sanctioned. This would minimise the diversion of the dollar, thus creating artificial scarcity,” say Afrinvest analysts.
For quite some time now, the official exchange rate has remained stagnant between N153 and N156, despite increased foreign reserves. But the unofficial (street market) rate has gradually moved from a deviation of N1 or N2 to about N20 per dollar, creating an ingenius bank or Bureau de Change (BDC), for instance to make monthly arbitrage of about N20 million by simply buying $1 million directly from CBN’s allocations and selling same elsewhere.
They argue that the development can create inducement of unbridled capital flight through the CBN’s forex auctions.
Bismarck Rewane, chief executive, Financial Derivatives Company said, “In the forex market, there is an increasing convergence between the parallel and official rates of the naira. The spread of N20 in December is now down to N17. The naira is trading at N173/$ at the parallel market. The dwindling external reserves currently at $43.29bn is putting speculative pressure on the naira. This is likely to tilt the sentiment of the committee towards further tightening.
There is a lot of uncertainty in respect of the future value of the naira if inflationary pressure eases, the fears may ease along.”
Afrinvest analysts further said, “The spread between the interbank and street rates was driven further apart by the policies introduced by the CBN in October 2013. Two key components of this policy include a Know Your Customer (KYC) policy at the BDC and the replacement of the WDAS with the RDAS system. We believe the CBN introduced these policies to prevent the dollarisation of the economy, regulate the flow of dollar trades and prevent arbitraging by “ingenius banks” in the system. Consequently, we believe this policy will be accompanied by short term pains i.e. depreciation of the Naira.”
Samir Gadio, analyst with Standard Bank London, said that although the Quantitative Easing tapering has had limited impact on the economy, concerns about the impending change of leadership at the CBN still persist.
“We have also seen limited capital outflows from the NGN-denominated fixed income market that would be intrinsically associated with the QE tapering story. But there is also little new money coming into fixed income assets, suggesting that offshore investors are concerned about the transition at the CBN and a possible shift in the monetary stance, which combined with loose fiscal policy, would push up USD/NGN and erode their returns. At this stage, it is more a wait-and-see attitude though, and exiting a high-yielding market may still look counter-productive to large segments of the foreign investor base.”
UBA Capital analysts said,”Whilst uncertainty over the upcoming monetary policy committee (MPC) meeting may further weaken foreign portfolio inflows, we expect local investor appetite for stocks to sustain the modest momentum in the market. Notably, we expect the MPC to maintain “status quo”, pending further clarity on local and external risk factors to financial system stability. Hence, the monetary policy rate will be maintained at 12% but the MPC will send strong signal on liquidity and FX management, with consideration of 100% cash reserve requirement on public sector deposits, in the event that the Federal Ministry of Finance does not implement the Treasury Single Account. Interestingly, market breadth turned positive today; 33 gainers Vs. 25 losers. Thus, we remain upbeat on equities in the year, with preference for Financials.”
An executive director of an Asset management company said, “With arbitrage opportunity of up to N20 between official and parallel market rates ,the battle to stabilise the exchange rate and avoid depreciation has failed and it is only a matter of time that the official exchange rate will be depreciated, if only to close the huge arbitrage opportunity.”
Rewane further said that “Key macroeconomic indicators that are on the radar screen of the CBN include external reserves, oil production and fiscal spending.”
By: John Omachonu
