There are indications that external influences may have infiltrated the decision-making process of the Monetary Policy Committee (MPC) meeting starting today in Abuja.
Considering the preceding hawkish outcomes of MPC meetings, members may not take strong decisions until the governor-designate assumes office in June, BusinessDay investigations have shown.
The approach, considered as ‘robust and mature’ by some analysts, it was further gathered, is as a result of the fact that the monetary policy options available to MPC for the management of price and exchange rate are fast becoming limited.
On account of this development, the CBN interim governor, Sarah Alade, and most members are said to be favourably disposed to a less-aggressive approach but are still committed to achieving flexibility in the exchange rate which some of them have been canvassing for, BusinessDay gathered.
Some analysts see the meeting as likely to be more closely monitored by onshore and foreign investors as the decisions are coming amid a period of upward pressure on USD/NGN which has produced a sustained erosion of FX reserves, capital outflows and weak domestic confidence.
Besides, the continued drop in the foreign reserves, at $38.4 billion as at March 17, is raising concerns over the sustainability of the CBN FX stance as it is expected to also contain the growing spread between the interbank and RDAS rates.
“In a heavily-managed exchange rate, such a trend in FX reserves is often the prelude to a devaluation and sometimes a proper run on the currency, if the public loses confidence in the FX regime,” says Samir Gadio, emerging markets strategist, Standard Bank, London.
“Still, of the USD17.5 billion or so of remaining foreign holdings in the Nigerian market, we suspect further portfolio outflows will probably not exceed USD4-5 billion in a base scenario, as a number of real money investors and index trackers will reduce their exposure, but not exit the market entirely. Besides, a large majority of offshore holdings are now in equities, and a downturn in this sub-balance would reflect both actual outflows and the intrinsic contraction in valuations,” he adds.
Consequently, other members are said to have prepared to approach the two-day deliberations with caution so as not to hedge against growing negative market sentiments over currency and exchange rate volatility.
Some other analysts said over the weekend that decisive steps on the interest rate front would be required to stop or at least slow the decline in FX reserves, restore confidence in the market and boost the competitiveness of Nigerian fixed income securities.
At the January meeting, Alade, as at then the deputy governor, had advised her colleagues that “given that monetary policy is approaching its limit, there is need to allow for more flexibility in the exchange rate”.
She reasoned that as a result of the United States Quantitative Easing or tapering, it was important that an appropriate exchange rate policy be adopted to balance the objective of stable currency without unduly depleting the accumulated reserves, as she feared that exit of the cheap money would impact negatively on the nation’s fiscal buffers.
“The dilemma is what monetary policy instrument is available to use to curtail money supply and rein in the demand for foreign exchange,” said Bolade Agboola, executive director, Cashcraft Asset Management.
Hussaini Muhammed, MD/CEO, Muregi Associates, however, expressed the opinion that there might not be any radical change because Alade is there in acting capacity.
“The deterioration is and has been with us for quite some time now. Therefore, nothing will radically change for now. Remember, she is in an acting capacity and even if we assume her powers are not limited, she will exercise caution for many reasons. Most importantly, she will want to be her own person now and not necessarily be influenced by the other members or any other external influences. If she does, it may be to her own detriment,” Muhammed said.
Again, Gadio believes that the key consideration at the MPC will most likely be the sustained pressure on the exchange rate and the continued erosion of FX reserves, adding, “The fundamental question is obviously how long the CBN can afford to defend the exchange rate amid a deteriorating FX reserves position and what would be the inflection point below which it would depart from this stance.”
For Razia Khan, analyst with Standard Chartered Bank, London, “While it is certainly the case that recent events, with the withdrawal of a large amount of foreign investor interest from the Nigerian market, will pose the key test for the MPC, we nonetheless expect some level of continuity in terms of what MPC members would wish to achieve. Price stability remains the ultimate goal, with some intent to safeguard FX reserves in order not to impact negatively the ability of the authorities to achieve price stability in the future. From this perspective, a hike in the public sector CRR to 100 percent remains most plausible.”
John Omachonu
