Godwin Emefiele, CBN governor
Although the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is not scheduled to meet until November 24, except it elects to convene an emergency meeting this week, a chain of factors including the fall in oil prices; depletion of fiscal and external buffers; renewed speculative and fundamental currency pressure; and high banking system liquidity would compel the central bank to consider a number of options that may feature at the all-important meeting.
The regulatory response is coming against the backdrop of the volatility in the currency market, which compelled the CBN to intervene in the forex market on Friday to prop up the value of the nation’s currency after it fell to a five-year low the day before.
In the first scenario, market analysts were of the view that the MPC may maintain the status quo on current monetary policy stance (with a 40 per cent probability).
The Monthly Economic News and Views delivered at the Lagos Business School by the Managing Director, Financial Derivatives Company (FDC), Mr. Bismarck Rewane, on Friday said should the MPC maintain the status quo next week, the Nigeria Interbank Offered Rate (NIBOR) would remain low, while external reserves depletion would continue.
The report also said if this should happen, then Nigeria should expect naira depreciation to N175/$ at the interbank market.
According to the report, another scenario, with a 50-per-cent probability, is for the MPC to tighten monetary policy – increase the Cash Reserve Ratio (CRR) on private sector funds to 18 per cent, while CRR for public sector funds could be moved from 75 per cent to 100 per cent. Should this happen, the exchange rate midpoint could be left at N155 to the greenback.
If the committee adopts this scenario, Rewane said there would be a temporary ease in currency pressure; a slowdown in external reserves depletion; reduction in banking system liquidity; and a reduction in the net interest margin and banks’ profitability.
However, another scenario, with a 10-per-cent probability, is for the MPC to tighten monetary policy by increasing the CRR on private sector funds to 18 per cent, increase the public sector CRR to 100 per cent, and move the exchange rate band.
The immediate result of this measure, the report said, would be an ease in currency pressure; slowdown in external reserves depletion; a reduction in banking system liquidity; and a reduction in the net interest margin and banks’ profitability.
Last Friday, the naira closed at N165.90 to the dollar in the interbank market, compared to N170.65 the previous day as the CBN Deputy Governor (Economic Policy), Dr. Sarah Alade, disclosed to Bloomberg that the central bank intervened in the market to defend the naira after it plunged to a five-year low amid a drop in oil prices.
The naira had gone into a tailspin losing 1.6 per cent of its value after the CBN issued new administrative measures restricting the use of CBN funds for many categories of eligible transactions.
The forex contagion also spread to the stock market, dragging the index down by four per cent, bringing the year-to-date loss to 16.53 per cent, according to FDC.
The genesis of this volatility lies in the 28 per cent decline in oil prices, which remains the largest revenue contributor in Nigeria. To this end, the FDC expressed the belief that the MPC was likely to make some changes to the monetary policy at its next meeting.
In what looked like the introduction of exchange rate controls, the CBN gave a two-day window for the utilisation of intervention funds. According to FDC, the attendant revenue loss on unsold dollars purchased is expected to reduce the speculative activities of the banks on forex.
The development, according to the report, may also increase the frequency of CBN’s intervention, as banks may reduce the quantum of forex purchased during each intervention, while dollar sales to BDCs have been restricted, effectively reducing dollar cash at the parallel market.
“On the flip side, the restriction may lead to excess demand at the interbank market and widen the divergence,” FDC said, adding that the premium between the two market rates is expected to increase and expand the arbitrage opportunity.
It noted that the willingness to defend is strong but the ability to defend is falling apart. For instance, in 2005-2008, Nigeria’s external reserves build was robust at $62 billion. So when oil prices declined in late 2008, the naira was allowed to fall from N118 to N160 before settling at N150 to N155.
In addition, the central bank on Thursday banned the sale of dollars to importers of telecoms equipment, power generators, electronics, invisible trade transaction and finished goods at its foreign exchange auction, funnelling demand to the interbank market.
Whilst the CBN’s recent regulatory reforms in the FX market were ideally targeted at cushioning the run on foreign reserves, the unintended consequence at the interbank may have brought to fore the challenges the central bank faces.
Whilst the CBN’s recent regulatory reforms in the FX market were ideally targeted at cushioning the run on foreign reserves, the unintended consequence at the interbank may have brought to fore the challenges the central bank faces.
“We anticipate the pressure will be sustained next week particularly at the BDC segment of the market, as a panic positioning on the greenback commences,” the FDC report said.
Reacting to the ban imposed on certain importers, Mr. Adesoji Solanke, a banking analyst at Renaissance Capital, a financial advisory in Lagos, said the policy would have more of an implicit asset quality implication for the sector.
He added in a note e-mailed to THISDAY: “Customers that are affected by this transfer of their forex demand to the interbank market basically see their imports get 8-10 per cent more expensive.
“Speaking with one of the banks, the rough estimate of the volume of official demand that is getting transferred was put at 30-35 per cent, which is quite significant.
“The rules hurt at a sector level but we see the tier- 2 banks taking more pain on the back of this, given their relatively higher exposure to SMEs and lower quality obligors. The ability of the obligors to transfer this cost to consumers also affects their capacity to service open obligations.”
But expressing the determination of the central bank to defend the naira, Alade said: “We are in the market now. We haven’t abandoned the market. We will continue to defend the currency.”
Dealers added that the central bank sold undisclosed amount of dollars. “We saw the central bank increase its dollar sales at the interbank market today to counter surging demand and reassure the market of its intention to continue to defend the naira,” one dealer told Reuters.
Traders said the dollar sales by the central bank, coupled with flows from the Nigerian National Petroleum Corporation (NNPC) on Thursday, further strengthened the local currency by Friday.
Another measure introduced by the CBN last week was the cap it placed on banks’ deposits that earn interest.
In a circular last Thursday, the central bank said it had observed that banks and discount houses now have a preference for keeping their idle balances in its Standing Deposit Facility (SDF), thereby constraining the process of financial intermediation.
In order to encourage banks to increase lending to the productive sector of the economy, the regulator therefore announced a review of the guidelines for the operations of the SDF.
Specifically, it stated that the remunerable daily placements by banks and discount houses at the SDF shall not exceed N7.5 billion. This shall be remunerated at the SDF rate of 10 per cent per annum.
“Any deposit by a bank and discount house in excess of N7.5 billion shall not be remunerated. These provisions are without prejudice to the subsisting Monetary Policy Rate (MPR) corridor. For the avoidance of doubt, the SDF remains as a monetary policy tool,” it said in the circular.
According to the banking sector regulator, the MPR corridor remains +/- 200 basis points, that is 10 per cent per annum up to the limit of N7.5 billion.
Reacting to the directive, a market analyst who preferred not to be named, said it was negative for the naira.
“I think this is negative for the naira, because it will result in banks diverting funds to treasury bills, which will put further downward pressure on yields and make them less attractive to foreign investors,” he explained.
Source: thisday
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