Crucial decisions around the need for the establishment of a strong mechanism for allocating foreign exchange to drive efficiency and transparency in that market are expected to be made today, as the Monetary Policy Committee (MPC) rounds off meeting.
The decisions are key, as they coincide with President Muhammadu Buhari’s avowed timeline for announcing a cabinet, which politics and business watchers say will lead to government pointing a clear policy direction and gaining traction.
The decisions on reduction in Cash Reserve Ratio (CRR), a fall out from the negative impact of the Treasury Single Account (TSA) and need to avert the impending delisting from its Government Bond Index Emerging Market (GBIEM) by JP Morgan are expected to bring reprieve to the banks and make the market liquid to avoid the sanction.
Also, the meeting is expected to make categorical decisions on the relevance of the continued funding of the Bureau De Change (BDCs) operators, which had not eliminated arbitrage opportunities, but rather continued to widen with the average of N25 as against N10 over three months ago.
“Decisions of the MPC meeting today are crucial, as this is the defining month, with the announcement of a cabinet, TSA implementation and giving impetus to the fight against corruption and elimination of leakages by the administration, which would find meaning in the quality of members to be appointed,” says Friday Ameh, an energy analyst.
“September will be unique because the outlook of the government would be discerned by the preponderance and character of the core team of the cabinet .The combination will reveal the government’s economic direction and the methodology of the fight against corruption and the tackling of the daunting economic challenges, as the economy operates in the mode of $50 per barrel oil regime, as against the average $100 per barrel oil regime which held between 2010 and 2014,” says Bolade Agboola, executive director, Cashcraft Asset Management limited.”
Some of the members, BusinessDay gathered, re-echoed their opposition to the bail out of states when the Federal Government continues to channel huge sums of money into uneconomic and corruption prone ventures like the petroleum subsidy scheme.
Analysts at the FSDH Merchant Bank believe that the recent domestic and international economic and financial market developments provide strong arguments for the MPC to change its policy stance in order to increase the level of liquidity in the financial market, to support credit growth in the economy.
“In our view, the most cost effective policy response from the CBN is through the reduction in the CRR. A reduction in the CRR to 26.09% will completely neutralise the impact of the TSA implementation on FGN Deposits, while a reduction of CRR to 22.79% will completely neutralise the impact of the implementation of TSA on all government deposits. Any reduction beyond what we mentioned here will inject more liquidity into the system than pre-TSA implementation.
“Looking at recent developments, we expect the MPC members to hold the MPR and the LR at the current rate, while the implementation of the TSA is a compelling reason for the reduction of the harmonised CRR to about 20% in order to neutralise the impact of the withdrawal of FGN funds from the banks via the TSA implementation and inject additional liquidity to support growth in the economy,” say FSDH analysts.
Kate Isabota, research analyst at Dunn Loren Merrifield says, “We note that the CBN has been largely pro-active in managing currency pressures through the use of administrative strategies and expect this to be intensified to rein in expected pressures that will arise from the consequence of the JP Morgan announcement.”
Opeyemi Agbaje’s RTC’s Business and Economic Review for August 2015 says “ We observe that the economic costs of the absence of an economic team and coherent policy in terms of lower growth, declining manufacturing performance, declining FDI, rising inflation, increasing unemployment, declining capital market performance and low job creation have been quite severe.
“We conclude by noting that concerning Nigeria’s macroeconomic conditions, everything now turns on the quality and speed of appointment of President Buhari’s cabinet and the efficacy and soundness of the policy direction they chart for the nation.”
Atedo Peterside, Chairman, Stanbic IBTC Holdings Plc, in a welcome address at Standard Bank’s West Africa Investors’ Conference in Lagos last week said.
“We believe that the sharp change in economic realities requires decisive policy steps to address the “new normal”, as it is unlikely that an improvement in execution efficiency along the previous trajectory alone will deliver the quantum of new investment activity, economic growth and job creation that is urgently needed to meet the yearnings of the populace.”
Peterside further argued that “If we acknowledge then, that Nigeria must accelerate economic growth and job creation and also accept that public sector capital will be insufficient to deliver the kind of growth needed, it makes it absolutely imperative that we articulate a clear, consistent policy direction that states Nigeria’s priorities upfront, and makes the rules of engagement of private capital as clear as possible.
“These rules must also be holistic, rather than arbitrary and should not hinge on the unbridled fixation with keeping all inherited factor prices, subsidies and exchange rates constant. This is the challenge facing the economic team that the President will soon pick.”
Ganiyu Garba, member MPC, at the last meeting said, “A key area of failure besides the widening spread and the pressures to depreciate far in excess of fundamentals, is the structure of allocation of forex and its implications for growth and external balance.
“I am convinced that unless an allocative mechanism that restores credibility, liquidity and confidence is designed and perationalised, the opportunities for
arbitrage and currency depreciation are more likely to persist, and so would be the demand and related pressures.
“The idea of funding BDCs to narrow spread has not been successful: spread has widened, creating opportunities for arbitrage and short positions that self-fulfills depreciations.”
Chibuike Uche, also a member of the MPC said in his contributions that “One is also at a loss as to why the CBN should be asked to bail out the states, when the Federal Government continues to channel huge sums of money from the Distributable Pools Account into uneconomic and corruption prone ventures like the petroleum subsidy scheme.”
John Omachonu
