CBN optimistic on convergence of FX rate

The Central Bank of Nigeria has said that it remains very optimistic that the official and parallel rate of the foreign exchange in the country will converge due to the level of its interventions in stabilising the naira.

This is even as the Monetary Policy Committee (MPC) Meeting of the CBN has retained the Monetary Policy Rate, MPR at 14.0 percent, Cash Reserve Ratio, CRR at 22.5 percent while Liquidity Ratio was maintained at 30.00 percent and the Assymetric Corridor pegged at +200 and -500 respectively.

CBN Governor, Mr. Godwin Emefiele, said this while briefing journalists in Abuja at the end of the MPC meeting on Tuesday, adding that the decision of the Committee was in line with the policy drive of the bank to ensure growth and stability of the economy especially the foreign exchange market, citing headwinds in the domestic economy and the uncertainties in the global environment as some of the factors responsible for the decision.

Emefiele said that available data and forecasts of key economic variables as well as the newly released Federal Government’s Economic Recovery and Growth Plan (ERGP), indicate prospects of output recovery in 2017.

According him, the apex bank expected that the implementation of this plan, the new foreign exchange policy as well as the current effort by the Federal Government to restore peace in the Niger Delta region would help revive economic growth and stabilise prices.

The Committee said that it remains of the conviction that fiscal policy remained the most potent panacea to most of the key negative undercurrents such as stunted economic activity, heightened unemployment and high inflation.

In spite of the recent moderate recovery in oil prices, the Committee approached developments in commodity prices cautiously.

Emiefele further pointed out that the era of high oil prices was over, thus making diversification away from oil more imperative today than ever.

He noted that the naira exchange rate with the dollar remained stable, adding that the naira was floated “within a range” against the dollar.

The naira, held around 305 per dollar for almost a year, was recently effectively devalued to 307 to a dollar and continues to tightly manage the rate with the belief that it will converge soon given the level of interventions it has taken.

“We have seen the rates converging and we are strongly very optimistic that rate will converge further,” he said, referring to the gap between the naira’s official and black market rate.

On the impact of the CBN policy of Forex interventions and the sustainability owing to allegations that the National Executive Council (NEC) directed the apex bank to take certain decision, the governor said: “I have heard about the NEC directing the CBN. Let me make it clear, the NEC did not direct the CBN.

Central Bank made a presentation on the Nigerian economy and the FX market and the NEC thereafter advised that we should look into all the issues that have been discussed on the foreign exchange market.

“But of course, before then we have started to see the rising trend in the exchange rate particularly at the parallel market and we have taken a decision that there was the need to reverse the trend and that is the reason we specifically started the FX intervention and I am happy indeed, very gratified that those interventions are very positive, we have seen the rate now converging and we are strongly optimistic that the rate will converge further.”

“In terms of sustainability I think, it’s important for us to say that reserve at this time is still trending upward to almost close to $31bn as I speak with you, and the fact that we have done this consistently for close to five weeks, should tell everybody or those who doubt the strength of the Central Bank to sustain this policy.

For me, they are taking a risk and they will lose in their bid to place a wrong bet. The direction is that there is a determination to see to the convergence of those rates and with what we have seen so far, we are very optimistic that those rates will converge. And all the elements in the foreign exchange will no doubt be implemented.”

The committee noted that money supply (M2) contracted by 5.73 per cent in February 2017, annualized at -34.38 per cent in contrast to the provisional growth benchmark of 10.29 per cent for 2017. Similarly, Net Domestic Credit (NDC) contracted by 1.41 per cent in February, 2017, annualized to 8.46 per cent, being significantly below the 17.93 per cent provisional growth benchmark for 2017. Likewise, net credit to government contracted at an annualized rate of 49.74 per cent, representing 82.86 per cent below its programmed target of 33.12 per cent.

In effect, all the major monetary aggregates contracted by end-February and underperformed their programmed provisional benchmarks for fiscal 2017.

Headline inflation (year-on-year), however, declined for the first time in 15 months, dropping by 0.94 percentage point to 17.78 per cent in February, from the 18.72 per cent recorded in January2017, and 18.55 per cent in December, 2016 seemingly reversing the monthly upward momentum recorded since January, 2016.

The moderation in headline inflation in February, 2017 reflected base effect as well as decline in the core component, which fell by 1.90 percentage points from 17.90 per cent in January to 16.0 per cent in February, 2017. The food index, however, rose to 18.53 per cent in February, a 0.71 percentage point increase over the 17.87 per cent recorded in January, 2017.

The CBN noted that data released by the National Bureau of Statistics (NBS) in February 2017 showed that the economy contracted marginally by 1.30 per cent in Q4 2016, effectively remaining in recession since Q2 2016.

Overall, in 2016, the economy contracted by 1.51 per cent, with the contraction in Q4 being the least since Q2 2016. The non-oil sector grew by 0.33 per cent in Q4, largely reflecting the slowdown in the agricultural sector, which decelerated to 4. 03 per cent in Q4 2016 from the 4.54 per cent recorded in Q3 2016.

The CBN Governor also said due to adverse global macroeconomic challenges, the nation’s banking sector is becoming less resilient.

Emefiele said the MPC meeting considered the arguments for loosening the stance of monetary policy, noting its desirability in stimulating aggregate demand if credit increased with lower rates of interest.

He noted the arguments that loose monetary policy was capable of delivering cheaper credit, making it more attractive for Nigerians to acquire assets, thus increasing wealth and stimulating aggregate spending and confidence by economic agents, which would eventually lead to lower Non-performing loans in the system.

According to him, “the counterfactual argument against loosening was anchored on the upward trending month-on-month inflation and its impact on the exchange rate.

“Loosening would thus worsen the already negative real interest rate, widen the interest rate spread and reverse the positive outlook for the current account position.”
He reiterated that the committee resolved to continue to pursue financial system stability.

“To this end, the Committee enjoined the Management of the Bank to work with Deposit Money Banks (DBMs) to promptly address rising Non-Performing Loans, declining asset quality, credit concentration and high foreign exchange exposures.

“The Committee also noted the benefits of loosening at this time which will be in line with the needs of fiscal policy to restart growth. The MPC, however, noted that loosening would exacerbate inflationary pressures, worsen the exchange rate and further pull the real interest rate into negative territory. Since interest rates are sticky downwards, loosening may not necessarily transmit into lower retail lending rates.