In what has been seen as shocking but bold decisions, the Central Bank of Nigeria (CBN) on Tuesday announced some drastic measures to save the embattled naira, dwindling foreign reserves by officially devaluing the local currency, and hiking interest rates, all of which compliment recent fiscal efforts at saving the economy.
The CBN adjusted the naira official exchange rate from N155/US$ to N168/US$, while also widening the band around the midpoint by 200 basis points from +/-3 per cent to +/-5 per cent. The foreign exchange trading position was however left at 1 per cent.
Part of the measures handed down yesterday by CBN governor Emefiele, after a crucial meeting of the Monetary Policy Committee (MPC), was also a raise in the Monetary Policy Rate – the MPR by 100 basis points from 12 to 13 per cent. But the symmetric corridor of +/- 200 basis points around the anchor rate was however, maintained.
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Analysts said yesterday that with the CBN’s decisions which literally compliment recent austerity measures announced by fiscal authorities, Nigerians should be ready for what they called, “short-term pains, but long gains.”
The CBN also raised the Cash Reserve Ratio (CRR) on private sector deposits by 500 basis points, from 15 per cent to 20 per cent, with immediate effect, however retaining public sector CRR at its current level of 75 per cent.
Analysts expect that the immediate impact would be seen in a hike in banks interest rates, as well as a significant rise in core inflation which held firm for the third consecutive month in September at 6.3 percent (year-on-year), steadying for the lowest rate increases recorded this year. But the CBN is confident that headline inflation would stay with the single digit band within the year, Godwin Emefiele said.
In a quick reaction to the decisions, Razia Khan, managing director, Head, Africa Macro Global Research, Standard Chartered Bank exclaimed, “Wow! Big surprises from the Central Bank of Nigeria.”
She said that although they had forecast some CRR tightening, and an RDAS devaluation to a more realistic level, “the CBN MPC has exceeded expectations.”
She said with these moves, the CBN has shown absolute commitment to dealing with current challenges.
“They have not shied away from the tightening needed to sustain current FX reserves. The official devaluation of the NGN allows the RDAS to move within the range that straddles the interbank FX rate,” Khan informed BusinessDay in a mailed response.
Khan noted that while the market reaction to the RDAS move in the near-term would be important, these measures deal as comprehensively as possible with the challenges facing Nigeria.
“While Nigeria cannot do much to influence the oil price, the combination of measures today send a powerful signal to all stakeholders on the CBN’s intent to do what it can to preserve macroeconomic stability,” she added.
