CENTRAL OF NIGIERIA SINKING OR SWIMMING

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.