CBN sets agenda for post-election stability, leaves rates unchanged

29 March 2015, Abuja – Up till yesterday, the most important issue in Nigeria was the choice of the next president for the country. It was a process which many had feared could trigger crises with its attendant consequences on both the political and economic scenes.

Central Bank of Nigeria, CBN.

Central Bank of Nigeria, CBN.

However, with the presidential election regarded as a done deal after yesterday’s polls, economic affairs commentators said discussions have shifted from whether the election would be peaceful or not to the task before the winner of the election who has the onerous task of stabilising the economy.

The Meeting
It was in anticipation of this scenario that the Monetary Policy Committee of the Central Bank of Nigeria, at its last week meeting, voted not to tamper with the existing policy. The CBN decided to retain the monetary policy rate (MPR), otherwise known as the interest rate, at 13 per cent as well as banks’ cash reserve requirement (CRR) on private sector deposits at 20 per cent and that of the public sector deposits also at 75 per cent.

The Governor of the apex bank, Mr. Godwin Emefiele, who read the committee’s communiqué, said all 11 members unanimously voted to retain the rate, adding that its previous decisions needed time for their effects to fully permeate the economy.
The committee, according to Emefiele, expressed concern about the outlook for growth, which had moderated partly due to the effects of low oil prices, naira exchange rate depreciation, and election-related concerns.
Emefiele, nonetheless, said the CBN remained optimistic that the situation would improve once the elections are successfully conducted with the expected improvement in business confidence.

As a way of stabilising the system, the CBN announced the determination to tackle the issue of gradual dollarisation of the economy, insisting that the naira remained the currency of transactions in the economy and advised commercial banks to take all possible measures to address this development.

What Analysts Say
Some financial analysts who had been monitoring the activities of the MPC before last week’s meeting said the outcome of the meeting was expected because the most sensible thing was to allow the decision at the previous meeting to permeate in the system especially in view of the challenges associated with the general elections which began yesterday.

In his view, Managing Director, Cowrie Assets Management Limited, Mr.Johnson Chukwu, said he was not surprised that the committee decided to leave all the rates unchanged.

He believes economic policy decisions including monetary policies are not made in vacuum. He explained that policies take into cognisance the social and political environment within which the policies are to operate and impact upon.
“The decision by the Monetary Committee to keep rates unchanged was therefore the most appropriate decision given the current political environment,” adding that “any decision to the contrary would not only have compounded the level of uncertainties in the economic environment but would have had minimal effect in the face of near total focus on politics by economic agents.”

In his opinion, another financial expert and Head of Markets, Sterling Capitals, Mr. Sewa Wusu, said the apex bank took the best decision by avoiding further tightening in a period like this. He said, “I think the MPC took the right decision to maintain status quo in its monetary policy action.  Normally one would not have expected a rate hike in an election period. Most monetary authorities would normally dodge any tightening cycle till after the election process.”

Meeting Market Expectations
Commenting on the MPC meeting, Asst Vice President and Head, Research & Intelligence at BGL Plc, Mr. Olufemi Ademola, explained that the decision of the MPC was in line with  market’s expectation. “The effects of decisions taken at the last MPC meeting in January and the various actions taken by the CBN in-between have not totally worn off the market and since most of the situations in the economy are outside the scope of monetary policy, the decisions are apt. While some indicators would support further tightening (increase in inflation), others are in favour of moderation in interest rate (low liquidity in the financial system). The exchange situation also seems to have stabilised in the meantime; hence a HOLD position appears to be the optimal decision at this time.”

Commenting on what to expect as a response of the financial market in days ahead, Ademola said “The response of the financial market will be muted in the immediate since the decisions are in line with wider expectations. The mood of the market as to monetary policy is neutral going into the election; hence the “wait and see” decision is expected.

“Other actions and developments such as corporate actions are expected to drive the market reaction; most importantly the outcome of the presidential election, slated for Saturday March 28, 2015. A peaceful process and transparent conduct of the election and an outcome that reflect the wishes of the electorate would support positive sentiments in the market in the coming days,” he said.

As far as Wusu is concerned, the financial markets, largely had anticipated the MPC decision to maintain status quo on the need to ensure that the effects of previous tightening cycle are fully transmitted into the economy to achieve the desired results before assessing whether further tightening is necessary going forward. “Don’t forget that past monetary decisions were taken in anticipation to combat the consequence of increased election spending and inflationary expectations. As such, I do not expect the decision of the MPC to constitute any significant changes in the current direction of the financial markets. Most market participants, including the foreign portfolio managers would have priced in this expectation before now,” he maintained.

Meanwhile, the Cowrie Assets Management Company boss believes that the reason behind maintaining monetary rates is to allow for stability in the financial industry, noting that while the past few weeks have witnessed some calmness in foreign exchange market, the interbank money market has been in turmoil. He said, “The decision to keep Monetary Policy rates unchanged and the recent extension of the deadline for compliance by systemically important banks to the Basel 11 capital requirement would most likely bring some measure of stability to the interbank money market.”

In his interpretation of the MPC’s decision, Managing Director, Financial Derivatives Company Limited, Mr. Bismarck Rewane, said the MPC’s decision to maintain the status quo on its policy tools reinforces the institution’s determination to be seen as independent and autonomous of political influence.

According to him, “The marginal gain of the naira against the dollar since the scrapping of the auction shows that the currency is closer to its fair value. This will help reduce the rate of reserves depletion and boost investor confidence. Despite this development, the macroeconomic environment remains volatile as the recent gain in oil price is gradually being reversed due to increased non-OPEC supply.”

Interest Rates to Remain Unchanged
Speaking on the likely response of the markets to the latest decision, the FDC boss said, “The markets had already discounted the outcome of the MPC meeting, hence interest rates are likely to remain unchanged. Conversely, short term risk of excess liquidity concerns will increase the pressure on the naira. However, the CBN is likely to respond with increased administrative measures to stem this pressure.”

He explained that the MPC remains committed to its price and currency stability objectives, adding that the continued insecurity in the north and high political uncertainty remain sources of concern, particularly the danger of violence after the presidential polls. This, he said, could spur capital flow reversal and increase speculative pressure on the naira.

“In addition, the impact of the currency devaluation on core inflation with the seasonality impact of food prices remains a threat to inflation.
“Other factors such as the resumption of the plunge in global oil prices and likely reversal of portfolio flows are threats to government revenue and the external reserves level. In our view, the impact of the MPC decision on the economy and the markets in the near to medium term is expected to remain neutral. The probability of the US Federal Reserve Bank increasing interest rates and its impact on foreign portfolio investors’ appetite has tempered the view of the CBN on its ability to slash interest rates in the near term.”

More Stability after the Polls
And like other financial experts that aired their views in separate interviews with THISDAY, Rewane was optimistic that immediately after a transparent election, the markets and the economy are likely to witness a mild recovery.
He said, “The most important structural issue is that the closer we get to the real equilibrium exchange rate, the lower the adjustment required. This is because the exchange rate at N199/$ has arisen from the dismantling of the RDAS regime and is expected to engender investor confidence.

“Therefore, in post- election Nigeria we expect the exchange rate to float around the N202/$ level at the interbank and N225/$ level at the parallel market. The impact of a higher price for dollar purchases should reduce the effective demand over time.”
Speaking on the recent suspension of the Retail Dutch Auction System by the CBN, Chukwu said the decision of the Central bank to scrap the Retail and Wholesale Dutch Auction system is clearly the most appropriate policy decision required to eliminate rent seeking, round tripping, conserve the country’s foreign reserve and stabilise the exchange rate.

“As can be observed in the past few weeks, the local currency seems to be stabilising in the two major market segments and may be approaching market equilibrium. It would therefore be unproductive for policy makers to drastically alter the current market oriented forex management regime for another system of subsidy. Instead, one would expect the Central bank to drive this guided deregulation to a point where it would cease to be the major supplier to the market,” he said

On the issue of the dollarisation of the economy, Chukwu said the merger of the official rate and interbank rate has to a large extent addressed the issue of illegal use of foreign exchange. “Without the incentive of the large spread between the two market rates, the probability that a large number of businessmen would engage in round tripping is minimal. But in the absence of the right policy, it would have been extremely difficult for Central bank to identify, investigate and sanction all the many fraudulent businessmen who would have been attracted by the huge forex spread/margin to engage in illegal use of forex,” he said.

Naira Stability
Wusu is optimistic that post-election, we may experience stability in naira value. He said, “For the naira, we may likely see some level of stability after the election. This is premised on the fact that the election is peaceful. Whether you like it or not, most of the intense pressure on the Naira emanated from the electioneering spend. The major concern however that is the gap between the inter-bank and BDC is still wide, despite the convergence of rate by recent foreign exchange actions by CBN. N199/$ at the inter-bank to N224/$ at the BDC is about N25 or 13 per cent. But, I still think, we may likely see some level of stability after the election. Recall that the CBN reiterated its commitment to exchange rate stability, but highlighted some key upside risks to this during the MPC meeting which include;  the dwindling oil prices, impacts of US policy normalisation, the marginal level of oil savings which continue to affect market confidence.”
On his part, Ademola believes that depending on the conduct and outcome of the election, a different scenario is likely to play out as far as naira value is concerned.

He said, “Heightened risk of electoral violence is preventing investment flows into the country while encouraging capital flight. However, a peaceful outcome will reduce the tension and attract investors and capital flow back into the country to the benefit of the Naira. Although the low oil price continue to be a challenge, opportunities to invest in other sectors of the economy will tempers the effect on exchange rate volatility through increase in foreign investment (both direct and portfolio investment).”

And on how to win the war against the dollarization of the economy, Ademola said “the CBN has the most accurate information about the demand and supply of foreign exchange. With a strong will and the support of all enforcement agencies in the country, the commitment is achievable by the monetary authority.”


– Festus Akanbi, This Day

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