february forex inflow down by 8%
•Retains policy rates

By Babajide Komolafe & Emma Ujah
he Central Bank of Nigeria (CBN) yesterday warned that the rising incidence of bad loans has exposed the banking sector to macroeconomic adversity and weakened resilience in the sector.

The warning is coming one month after the Nigeria Deposit Corporation (NDIC), expressed similar concern, revealing that directors were liable for 40 percent of the N1.85 trillion bad loans in banks.

Speaking in Abuja, yesterday, while briefing the press on the decisions of the Monetary Policy Committee (MPC) meeting, CBN Governor, Mr. Godwin Emefiele said: “On outlook for financial stability, the committee noted that the banking sector was becoming less resilient as a result of the adverse macro-economic environment. Nevertheless, the MPC reiterated its resolve to continue to pursue financial system stability. To this end, the Committee enjoined the management of the bank to work with DMBs to promptly address rising NPLs, declining asset quality, credit concentration and high foreign exchange exposures.”

Emefiele said that members of the committee, after taking a critical look at the macro economy decided to retain the monetary policy rate at 14 per cent. Emefiele also reiterated the determination of the apex bank to sustain its intervention in the foreign exchange market in order to ensure stability of the naira exchange rate. Briefing the press at the end of the committee’s meeting, in Abuja, he said that members took a critical look at the macro economy and was left with no option than to leave the rate unchanged.

Retention of benchmark rates

“The Committee, in consideration of the headwinds in the domestic economy and the uncertainties in the global environment, decided by nine out of 10 members to retain the MPR at 14.0 per cent alongside all other policy parameters. One member voted to raise the MPR. In summary, the MPC decided to: Retain the MPR at 14 per cent; Retain  the  Cash Reserve Ratio (CRR)  at 22.5 per cent; Retain the Liquidity Ratio at 30 per cent; and retain the Asymmetric corridor at +200 and -500 basis points around the MPR.

The Committee also evaluated other challenges confronting the domestic economy and the opportunities for achieving price stability, conducive to growth in 2017. In particular, the Committee noted the persisting inflationary pressures; continuing output contraction; high unemployment rate; elevated demand pressure in the foreign exchange market; low credit to the real sector and weakening financial system indicators, amongst others. Nonetheless, members welcomed the improved implementation of the foreign exchange policy that resulted in naira’s recent appreciation. Similarly, the Committee expressed satisfaction on the release of the Economic Recovery and Growth Plan, and urged its speedy implementation with clear timelines and deliverables.  On the strength of these developments, the Committee felt inclined to maintain a hold on all policy parameters.”

Forex inflow

“Total foreign exchange inflows through the CBN decreased by 8.87 per cent in February, 2017 compared with the previous month, as foreign exchange market receipts were significantly lower. Total outflows also declined by 7.32 per cent during the same period. The Committee noted that the average Naira exchange rate remained stable at the inter-bank segment of the foreign exchange market in the review period.”

CBN to sustain forex intervention

Governor Emefiele vowed to sustain the bank’s interventions in the foreign exchange market through which consistent injections of dollars have raised the value of the Naira.

His words: “We have seen the rates now converging and we are strongly optimistic that the rates will converge further.

“In terms of sustainability, it is important for us to state at this point that reserves are trending upwards, close to $31 b and the fact that we have done this consistently up to four to five weeks should tell everybody or those who doubt the strength of the CBN to sustain this policy that we are able.

“It remains for me to say that they are taking a risk and are on the wrong side of the bet, given the direction that we are coming from.

“There is a determination to see to the convergence of those rates, and with what we have seen so far, we are very optimistic that those rates will converge, and all the elements on the foreign exchange market will no doubt be implemented. It is a programme and I am happy to say that programme is on course. We are happy that it is looking good beyond our expectations and those who remain on the sidelines doubting CBN’s ability to sustain this intervention are on the wrong side of the bet.”

Reacting to the fresh push to cut the powers of the CBN by the National Assembly, Mr. Emefiele said he expected the federal law makers to take decision on the apex bank of the nation based on international best practices and in the interest of the nation’s economy.

His words: “I have always said that the powers to make or to amend laws rest with the National Assembly. But I am very optimistic that the National Assembly, in an attempt to either make, abrogate or amend the law will in their wisdom, use international best practice, in an attempt to determine the course of action, not just for the CBN but also for the Nigerian economy.”

Analysts comment

According to Razia Khan of Standard Chartered Bank, United Kingdom, “The MPC appears to have resisted pressure from fiscal authorities for an easing of policy. By holding rates, and putting price stability at the centre of its ambition, the CBN could well be preparing for a more meaningful liberalisation, to come eventually, only when conditions are more conducive.

The CBN appeared comfortable that its forex reserves position will be safeguarded even as it steps up the pace of FX intervention.  Oil earnings are likely to provide a key test to this assumption.

For now, however, the emphasis is very much on holding everything steady, and achieving more convergence between the different forex rates. Greater convergence appears to be a necessary pre-condition to any further forex market liberalisation.”

Commenting on the unchanged policy, FXTM Research Analyst, Lukman Otunuga said: “The fact that the Central Bank of Nigeria has decided to keep monetary policy unchanged should be no surprise especially when factoring how the nation is in the process of a critical structural transformation.

“Although the lingering fears decelerating economic growth and concerns over surging prices have partially attributed to the Central Bank’s passive stance, the overall sentiment towards the nation continues to display early signs of improvement.

“Some optimism exists over the nation’s recovery, with Nigeria’s inflation declining for the first time in 15 months in February and the noticeable increase in Dollar sales for importers bolstering the Naira on the black market exchange. If economic data continues to follow a positive path in the longer term and inflation cools then there is a possibility of the Central Bank cutting interest rates to stimulate growth.”

On their part, analysts at Financial Derivatives Company Limited (FDC), stated: “The MPC once again maintained status quo on all monetary policy parameters. While rolling out its decision, the MPC also mentioned uncertainty in the global economy. The apex bank’s wait-and-see approach came as no surprise and is based on the need to monitor the inflationary expectations as well as assess the impact of the current forex intervention. The recent confirmation of a stable outlook by S&P seems reassuring especially in a period when Nigeria tries to restore investor confidence. Furthermore, a gradual improvement in GDP growth rate, increasing external reserves and improved oil production also factored in the MPC’s decision.

“The CBN’s capacity to reduce interest rates in the near future will hinge on several factors including the Q1 2017 GDP growth numbers, headline inflation in March and April, crude oil production and the exchange rate.”

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