The Monetary Policy Committee, MPC, of the Central Bank of Nigeria, CBN, last week met amidst worsening macroeconomic environment which had forced Nigeria’s economic growth rate into negative for the first quarter of 2016, while threatening to slide into recession by the end of current quarter.
As usual only two dominant issues were in focus: foreign exchange and interest rates.
It is noteworthy that for the first time the apex bank admitted helplessness in the face of the huge economic problems facing its policies. CBN also expressed frustrations with the fiscal policy environment which it had battled silently for years. The situation deteriorated since President Mohammadu Buhari’s regime.
The import of this landmark note was that the apex bank was forced into decisions it would normally not take.
First, the decision to have a three-tier foreign exchange market was not only forced on the bank by circumstances, but the CBN also appeared reluctant and unprepared for the policy it announced. The apex bank is yet to figure out the implementation mechanism one week (and still counting) after the policy was introduced.
The three-tier foreign exchange market regime implied multiple exchange rates where CBN, while abandoning its regimented system of fixing both volume of supply and rates, has now liberalized one window for market determined supply quantity and rate. It also retained a special window for critical transactions, most likely at concessionary rate. The third window would be the parallel market where almost any thing could go.
The second MPC decision: the apex bank left monetary rates unchanged despite the compelling need for change. In fact some sources close to members of the Committee squealed that the decision to leave Monetary Policy Rate, MPR, unchanged at 12 per cent was a last minute knee-jerk response to the gross domestic product, GDP, report released by another government agency, National Bureau of Statistics, NBS, just a working day before the MPC, a development which altered the initial submissions of the Committee members.
Consequently the apex bank was forced to retain an MPR rate that is grossly negative to the inflation rate, contrary to the grundnorm in monetary policies across the world.
Now we are in the thick of a fire-fighting foreign exchange and money rate regime where we highlight some likely policy outcomes in the short to medium term.
The forex market response has been largely stable with the official window totally unchanged while parallel market saw a marginal 1.4 per cent depreciation of Naira. However, the gap between the official and parallel market rates widened to 65%.
Already the stock market has responded swiftly with an unprecedented upswing that reversed year-to-date loss records, posting significant positive returns instead.
Treasury instruments turned bullish while the yield spiked.
Overall we believe all the reactions were short term as both stock and treasury markets as well as forex dealers still await the operating guidelines and implementation details of the new “flexible” forex market.
Consequently, we warn that the rebounds and reliefs witnessed so far may just be short-lived and illusory if the upcoming “flexible” forex policy proves to be lacking in real market principles and most importantly, transparency. This is the opportunity to repair the damage done to the economy in the past one year by rigid principles of administrative controls in a free market economy.
The emerging policy would be a swim or sink for the CBN and the economy.