Festus Akanbi And Malachy Agbo
27 November 2011
Although there seems to be a consensus of opinion over the decision by the CBN to keep its benchmark interest rate unchanged at the last week’s Monetary Policy Committee meeting, however, they differ on implications of a new mid-point for the naira target band, report Festus Akanbi and Malachy Agbo
Last week’s meeting of the Central Bank of Nigeria’s Monetary Policy Committee was significant in many respects. First, it was the last of such meetings this year, where crucial decisions on the nation’s monetary policies were to be taken. Second, it came at a time the finance ministry was finetuning the 2012 budget leading to the downward review of the benchmark pricing for oil from $75 per barrel to $70.
Naturally, expectations were high that the monetary authorities would factor the planned removal of the subsidy on petroleum products as from next year into their deliberations. Again, the meeting was held in midst of the crippling Euro zone crisis with rising fears that the contagion may sweep through emerging economies sooner than anticipated.
Key Decisions
At the end of the meeting last Monday, the CBN decided to keep its benchmark interest rate unchanged for the first time this year and devalued the naira. The mid-point of the naira target band was lowered to N155 to the dollar from N150, while the benchmark interest rate was left at 12 percent.
The CBN had raised its key rate at every meeting this year until last week, raising it by 2.75 percentage points on October 10 as inflation pressures mounted. But slower economic growth in the country and concerns that oil prices may decline as the global recovery wanes were some of the factors that shaped last MPC meeting.
According to the National Bureau of Statistics, Nigeria’s economic growth slowed to 7.4 percent in the third quarter from 7.7 percent in the previous three months as oil output eased, while oil price plunged 13 percent in New York in the first nine months of the year.
Moving in the Right Direction
One of those who monitored the Monday meeting was head of Africa Economic Research at Standard Chartered Plc in London, Razia Khan, who described the decision of the CBN to leave the rates unchanged as a step in the right direction at least, for now.
However, she did not see the move to relax the grip on the naira exchange rate as devaluation, arguing that foreign exchange rate was already within the range before it was officially adopted last Monday. Khan told THISDAY that “with monetary conditions already tight, there was little justification for further interest rate tightening at this point.
“The move on the foreign exchange rate is interesting. We do not view it as a devaluation, because the foreign exchange rate was effectively within the stated range prior to CBN’s announcement. It does show some sensitivity to market influences – which is good – but at the same time, the authorities are showing signs of remaining in control of the situation.”
She maintained that it was not as if the CBN was losing its grip of the exchange rate, pointing out that the apex bank will certainly not oversee continued weakness. “We expect the CBN to intervene as necessary to keep the foreign exchange rate in the current band, whether they do this through higher interest rates, or actual foreign exchange sales (occasionally) to the interbank market.
“Ultimately, the aim is to wean the market off its dependence on CBN foreign exchange sales at the WDAS, but it’s not a blanket approval of a market-determined exchange rate just yet. There will be limits,” she submitted.
On the planned convergence of foreign exchange rates, Khan said it was taken for granted that already the interbank rate is market-determined, adding that there is thus little need for it to adjust further in response to this latest news. “While liquidity is kept tight, we think the room for further exaggerated pressure on the naira is unlikely,” she said.
She explained that the transmission mechanism of monetary policy in many developing countries is always the subject of much debate. She said: “In Nigeria’s case, this is precisely why we believe the authorities will want to maintain relative influence on the foreign exchange rate – within certain parameters. It grants them at least some control over the one factor that might influence the foreign exchange rate.”
One of the questions raised by analysts in their reactions to last Monday’s meeting, was how long can the CBN hold on to the current rates? Khan said, “Prior to the meeting, we had thought that there would be a pause in monetary tightening. Let’s gauge the 2012 budget, see how much spending is actually reduced, and also whether there is in fact any action on fuel subsidies.
“Further tightening, to anchor inflation expectations, may be needed following the eventual lifting of fuel subsidies, or even some adjustment to the current subsidy.”
Protecting FX Reserves
Managing director/chief executive, Resources and Trust Company Limited, Mr. Opeyemi Agbaje, however, interpreted the decision of the MPC meeting differently. He explained that “in the short term, the CBN is clearly trading off some price stability for foreign currency reserves protection, in the face of clear market sentiments suggesting traders would have continued attacking the naira at any rate below N155. Some indeed are already assuming exchange rates around N165-N170, so the pressure could yet continue, though reduced.”
Saying that the apex bank had failed to rise to the occasion at the height of the strident calls by the International Monetary Fund to devalue the local currency, Agbaje said, “I think CBN missed the opportunity two years back to adopt greater exchange rate flexibility to prevent (as the IMF famously cautioned) ‘one-way bets’ against the naira.
“Unfortunately at this point, CBN is left with no option but to devalue, given the sustained and persistent market movement against the naira.” He warned that short term inflationary pressures will rise as importers re-price stocks to factor in higher exchange rates.
“With higher interest rates, possible the oil subsidy removal and higher electricity tariffs, the CBN is likely in the short term to lose its battle for single digit inflation,” Agbaje submitted.
Another finance expert who analysed the outcome of last week’s MPC meeting was the chief executive, GTB Securities Limited, Mr. John Ogar who described the decision to leave the MPR unchanged as the best in the circumstances.
According to him, “The monetary tightening stance of the CBN for most of this year in fighting inflationary pressures has negated and hurt other goals of monetary policy such as: Ensuring high level employment and ensuring healthy economic growth. Further tightening would have led to economic strangulation and be counter-productive, thus worsening an already complex situation.”
He noted that the CBN moved the band it wants the local naira currency to trade in to between N150-N160 against the US dollar, compared with N145-N155 to the dollar previously, due to the prolonged naira weakness.
When asked to explain how this stance will translate into stability in the economy, Ogar said, “From the viewpoint of CBN, this policy should minimise speculative activity in the foreign exchange market, and also enable an orderly and stable market to enable investors and importers to plan effectively. To the extent that demand pressures are contained by the CBN, then stability is achievable.”
Imported Inflation
On the implication of the veiled devaluation of naira on the economy, the GTB Securities boss said the measure will heighten imported inflation (as imported goods will be more expensive) and increase the inflationary pressure in the domestic economy, adding that it should, however, be positive for our export products (barring crude oil) which should be cheaper and hence more competitive in dollar terms.
Speaking on the attempt at the convergence of the rates in WDAS and the interbank market, Ogar said: “The task of achieving convergence in forex rates will be more challenging. As long as there is a gap between demand and supply in the forex market, autonomous sources will have to price in a premium to fill the gap. And to the extent that demand for foreign exchange remains elevated, to that extent will the gap widen, and hence, convergence will be difficult to achieve.
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