The next meeting of the monetary policy committee (MPC) is scheduled for the end of this week so this is a good time to revisit exchange-rate policy. Calls for a third devaluation in less than one year become ever louder. The offshore portfolio community remains on the sidelines in anticipation of such an adjustment. Since the start of the oil price slide in June 2014, official reserves declined through to the end of last month as the authorities have managed the exchange rate. Of course, this period has also seen two effective devaluations but we would stress that, once the adjustments were made in November and February, the CBN reverted to its game plan of management in the pursuit of exchange -rate stability.
Reformers favour a conversation to examine whether it might be better to hold the reserves stable and allow the resulting depreciation. This has been complicated by the intervention of Godwin Emefiele, the CBN governor, in his opening remarks to the Senate in Abuja on 08 July. He revealed that reserves had climbed to US$31.9bn the previous day. On the surface this conflicted with the CBN’s figure of US$29.6bn. The small print shows that the CBN series is constructed as a 30-day moving average. On this basis reserves have increased from the end of June through to 13 July so the reformers’ favoured conversation has lost its immediate edge.
This upward trend in reserves can be traced to the CBN’s most recent administrative measure, its circular dated 23 June which listed 41 import items no longer eligible for fx from official sources. Since some of these items are core imports such as rice, poultry and clothing, we should not be surprised by the pick-up in reserves. Supporters of the status quo can point to the upward trend and advocates of change can point to a parallel rate of about N240 per US dollar.
Our view is that we should look at the views of the decision takers: the MPC which announced the first devaluation in November, and the CBN which scrapped its fx auctions in February and thereby delivered the second. It makes sense to step back from talk of fair value, competitive exchange rates and dollarization, and see what the decision takers have to say.
We will start with the governor’s remarks to the Senate on 08 July. The pledge of “zero of tolerance for speculators” is the latest statement of the CBN’s view that the deposit money banks cannot be trusted in the fx market. This thinking led to its change in the auctions from wholesale to retail and subsequently their scrapping as well as the ruling on 72-hour utilization.
Emefiele made a broader point about the role of the CBN beyond monetary and exchange-rate policy, and banking regulation. It has a job to do in support of encouraging job creation and inclusive growth. The two roles overlap in that the CBN seeks to stimulate local production at the expense of imports. Critics may say that the CBN is straying from its mandate but should acknowledge that the governor’s two predecessors were also “guilty”
Secondly, we cite the CBN press release of 06 July in response to an article in The Economist on the 40 import items. It was delivered in a fighting spirit and vowed not to set policy to “satisfy few misguided DAYinterests in the market”. Again the CBN highlighted its developmental role in supporting local production. The article was not the magazine’s finest and the press release took a pot shot at a legitimate target. The press release noted that western economies deployed protectionist measures such as the EU’s common agricultural policy while Nigeria was criticized for looking after its own (farmers).
Thirdly, we refer to the communiqué following the last meeting of the MPC in late May. It warned of the impact of the normalisation of US monetary policy, which has since moved rather closer, played down the risks to inflation and congratulated itself on the attainment of exchange-rate stability. We note that the parallel rate has since been far from stable.
Our approach is to look closely at the core texts (governor’s remarks, CBN press release and MPC communiqué). It is a laborious exercise but acknowledges that the decisions are taken by reasonably autonomous Nigerian institutions.
Perhaps one third of MPC members favour an adjustment and probably more will join them. A move this week is unlikely in our view and we may see more measures to deter perceived speculative forces in the market.
We think that there will be another devaluation this year. The CBN does not feel that the oil market will come to its rescue. Indeed the governor referred to a “seemingly permanent fall” in the price. Inflation has already risen above the top of the target range and is projected in the CBN’s in-house forecasts to climb to double-digit levels in October. Fx demand has eased as its cost has increased and the administrative measures have multiplied. Yet the differential between the doctored interbank rate, and those at the bureaux de change and on the parallel market will require attention. We therefore see the interbank rate at N215 per US dollar within an unchanged corridor at year-end and the policy rate at 14.00 percent. We expect the CBN to continue to manage the exchange-rate with its box of monetary and other tools, and to maintain its developmental role.
GREGORY KRONSTEN
