After months of resisting calls for the adoption of a flexible foreign exchange regime, the Central Bank of Nigeria (CBN) on tuesday finally bowed to pressure, stating that it would introduce greater flexibility in the interbank foreign exchange market structure and retain a small window for critical transactions for prospective investors.
It equally warned that the Nigerian economy might further contract in the second quarter (Q2) of this year into a full blown recession, as some of the conditions which led to the contraction in the gross domestic product (GDP) growth rate in the first quarter remained largely unresolved.
The Nigerian economy contracted by -4 per cent in the first quarter of 2016, signalling the deteriorating economic conditions in the country and its first economic contraction in 25 years.
The central bank added that the weak outlook for growth, which was signalled in July 2015 when it warned of the risk of a recession, could extend to the second quarter of 2016.
It blamed the delayed passage of the 2016 budget for constraining the much-desired fiscal stimulus, which edged the economy towards contractionary output.
Also yesterday, while citing limited options in an already tight fiscal environment and the need to allow previous monetary policy decisions to crystalise, the CBN resolved to leave the monetary policy rate (MPR), otherwise known as the interest rate, unchanged at 12 per cent with the asymmetric corridor at +200 and -500 basis points around the MPR.
Addressing journalists in Abuja at the end of the two-day meeting of the Monetary Policy Committee (MPC), the CBN Governor, Mr. Godwin Emefiele, said the central bank resolved to introduce greater flexibility in the interbank foreign exchange market structure and to retain a small window for critical transactions for prospective investors.
Emefiele’s statement aligned with President Muhammadu Buhari’s speech during his budget presentation before the National Assembly on December 22, 2015, that the central bank would consider the adoption of a more flexible foreign exchange regime.
Despite his statement, Buhari remained vehemently opposed to the devaluation of the naira and supported the currency controls introduced by the CBN, which are now partly to blame for the contraction in the economy.
Emefiele said in arriving at MPC’s decisions, the nine members of the committee, who attended the meeting, assessed the relevant risk profiles and came to the conclusion that although the balance of risks remained tilted against growth, previous decisions needed time to crystallise.
He said: “Consequently, in a period of stagflation, the policy options are very limited. To avoid complicating the conditions, the committee decided on the least risky option to hold.
“With the foreign exchange market framework now ready, the MPC voted unanimously to adopt greater flexibility in the exchange rate policy to restore the automatic adjustment properties of the exchange rate.
“Consequently, all nine members voted to hold and introduce greater flexibility in managing the foreign exchange rate. The bank would however retain a small window for funding critical transactions.
“Details of operation of the market would be released by the bank at an appropriate time.”
Emefiele stated that the committee had in July 2015, warned about the possibility of the economy falling into recession unless appropriate complementary measures were taken by the monetary and fiscal authorities.
He said: “Unfortunately, the delayed passage of the 2016 budget constrained the much desired fiscal stimulus, thus edging the economy towards contractionary output. As a stopgap measure, the central bank continued to deploy all the instruments within its control in the hope of keeping the economy afloat.
“The actions however proved insufficient to fully avert the impending economic contraction. With some of the conditions that led to the contraction in Q1, 2016 still largely unresolved, the weak outlook for growth which was signalled in July 2015 could extend to Q2.
“To this effect, today’s policy actions have to be predicated on a less optimistic outlook for the economy in the short term, given that even after the delayed budgetary passage in May 2016, the initial monetary injection approved by the federal government may not impact the economy soon, as the processes involved in MDAs finalising procurement contracts before the disbursement of funds may further delay the much needed financial stimulus to restart growth.”
Asked to comment on the way forward for the economy, he said: “I think basically, this has to do with the fact that the authorities certainly know what to do, but I think what is important is that one aspect that is largely contributory to the situation we find ourselves today is the delay in the passage of the budget.
“The delay in the passage of the budget has created a few distortions in the system. You can imagine a situation where a budget is passed in May, a budget that should have been passed in January or latest, February.
“And the Minister of Budget and National Planning has himself commented that this would be the last time that would happen.
“Basically, the important thing is to note that a lot of activities are predicated on the passage of the budget; when the money in the budget is available to be spent either for capital projects, construction workers can get back to work, roads can begin to be reconstructed again; people will buy gravel, sand, cement; labourers would earn money and it would engender consumer purchases.
“What you find is that consumer purchases plus other expenditure constitute close to 85 per cent of the GDP computation. I think all of us must have learnt from this bad experience. And I am hoping that going forward, we would work together to ensure that we are well coordinated to this objective.”
The governor further claimed that Nigerians are currently buying forex at a higher rate than the official price.
He said: “That is untrue. The central bank still sells forex at N197 to the dollar but unfortunately, the situation is that people are not able to get the quantum of dollars they need and I imagine that people can understand that this is because of what the central bank has in its kitty as the supply of foreign exchange is too inadequate to meet demand.
“So what we do is to provide what we have available and expect that those who require foreign exchange will resort to other sources.”
He further foreclosed expectations that the new policy on forex flexibility would translate to the resumption of dollar sales to bureau de change (BDC) operators.
“The flexibility we are talking about will be worked out and details will be provided in the coming days but of course, BDCs are part of the foreign exchange market.
“But I am not by any means saying that we are going to restore BDCs as in providing dollars from the CBN to fund BDC operations. They will continue to operate in the autonomous market,” he said.
He also threw more light on what he meant by supplying forex for critical transactions, stating: “There are people who would want to import plant and equipment to produce goods where raw materials are almost 100 per cent available locally.
“We would support such attempts by people to set up factories, foreign direct investment coming in, or even local direct investment coming in, if they want to import plant and equipment and their raw materials are almost entirely available locally.
“We will look for an opportunity to provide the incentives that they need to import the equipment so we can produce locally and stimulate growth.
“Of course, where we have people who are producing items where the raw material content is so minimal, naturally we would give them assistance.
“But purely it would be for raw materials with content that is very low in terms of the import requirement, not people importing almost everything from plant and equipment to raw materials.”
However, he said the committee recognised that the exchange rate is a very important macroeconomic variable, “which must be earned by increased productive activity and exports”, noting that the central bank had made very significant and satisfactory progress with the reform framework for the forex market.
“The committee was of the view that the current adverse global and domestic economic and financial conditions and the imperatives imposed by the demand and supply shocks to the domestic economy and considering the express intentions of government as enunciated in the 2016 budget, the policy must respond appropriately as the market continues to demonstrate confidence in the bank’s ability to deliver a credible foreign exchange market.
“Accordingly, the MPC decided that the bank should embrace some level of flexibility in the foreign exchange market. Given the imperative for growth, the management of the bank has been given the mandate to work out the modalities for achieving the desired flexibility that is in the overall interest of the Nigerian economy and when the implementation of the new framework would begin,” he said.
Commenting on the outcome of the meeting of the MPC, financial analysts expressed divergent views on the decisions reached by the committee.