As the Central Bank of Nigeria (CBN) concludes its 245th Monetary Policy Committee (MPC) meeting today, analysts expect that the apex bank would leave the rates unchanged, especially with the nation’s foreign reserves rising gradually and steadily, while the inter-bank rates remain stable.
Analysts also believe that the CBN favours the use of administrative measures to counter perceived speculators and rebuild reserves, an example of which was its July 16 circular, stipulating that all transactions at bureaux de change must show the customer’s Bank Verification Number (BVN).
In a pre-MPC outlook on Thursday, for example, London-based, Chief Economist, Africa Global Research, Standard Chartered Bank, Razia Khan, expects a hold in the benchmark Monetary Policy Rate (MPR) at 13 per cent.
In a note, Khan said: “In our view, the CBN has limited scope for conventional monetary policy easing through an MPR cut. But tight liquidity is an increasing problem for Nigeria’s banking system, and will need to be addressed. Although the CBN harmonised its cash reserve ratios (CRR) at 31 percent in May, pressure is rising to amend the CRR, or at least ease its impact on the banking system.”
Since the last meeting in May, the withdrawal from the banking system of public-sector funds representing the revenue accounts of the Federal Government and its agencies has resulted in further liquidity tightening. In particular, Khan further expressed belief that the rise in the CBN’s foreign reserves may be due to the withdrawal of state-owned oil company deposits from the banking system, with forex-denominated deposits remitted back to the Federation account.
However, she maintained: “Given ongoing weak oil prices, and with Nigeria undershooting its budgeted oil output targets, FX reserves will likely remain pressured.”
While a slowing economy and negative month-on-month money supply growth may support easing, Nigeria’s FX regime does not allow easy solutions. Having already introduced import controls by banning importers of 41 goods from accessing foreign exchange from official inter-bank market, Khan said the CBN may rely more on administrative support of the naira exchange rate, pointing out that this is unsustainable long-term.
She warned that unless market determination of the interbank FX rate is restored with active two-way trading, Nigeria risks losing GBI-EM index inclusion and other investment may be deterred.
“For now, the policy trend appears to be for further controls rather than FX liberalisation. The publication of a new CBN requirement for the Bureaux de Change to report bank verification numbers of all clients (effective August) hints at the intention to exert even greater control over Nigeria’s parallel market. Reports suggest that USD-NGN has reached N244, signalling a wider spread with the more regulated interbank market, where it trades below N200,” she added.
Data obtained from the CBN’s website on Thursday, indicated that the nation’s foreign reserves rose by $1.698 billion, or 5.85 per cent in the first 22 days of July, closing at $ 30.697 billion, from $29.000 billion on June 30, 2015.
The reserves stood at $29.595 billion at the end of May; $29.528 billion on April 30; and $29.789 billion at the end of previous month.
Agreeing with Khan, analysts at FBN Capital Limited, led by London-based Gregory Kronsten noted in a research note to clients on Thursday: “Since reserves have started to pick up and since the inter-bank rate has been stable, this argument runs, what is the reason for another (rates) adjustment?”
Those at FSDH Limited, another investment banking outfit based in Lagos, reiterated in a note to clients on Wednesday “that a hold in policy rate is consistent with the short-term inflation outlook, as an increase will not in any way reduce the inflation rate.
“We expect the CBN to continue with (its) administrative measure in the management of the foreign exchange.
“We do not expect the MPC to increase the MPR or carry out a further devaluation of the Naira to boost foreign exchange inflows. An increase in the MPR and devaluation would lead to higher inflation,” FSDH analysts added.