Inflation to worsen over new exchange rate to consumer prices — Analysts

…say it’s unlikely CBN lose its control over flow of hard currencies

BY ODUNEWU SEGUN

AS investors and businesses eagerly await the details of the new foreign exchange policy announced by the Central Bank of Nigeria at its last Monetary Policy Committee held last week, Given the long history of official management of the country’s foreign-exchange system, it is unlikely that the CBN will remove all its controls over the flow of hard currencies.

According to experts, the shackles on the naira have not been completely removed with the committee’s decision to retain a small window for funding “critical” transactions that will probably see a concessionary, fixed, naira rate applied. In announcing the policy change at a news briefing in Lagos, the CBN governor, Godwin Emefiele, gave no details on how the shift in policy will be implemented, only saying that details would be released “at the appropriate time”.

“We have significant doubts on this, particularly as the plan to continue selling cheap dollars to critical foreign-exchange users raises questions on the integrity of the impending new order, especially if the selection process is not transparent. Access to cheaper currency for favouredor well connected businesses risks further distorting the economy and providing another avenue for corruption to take hold.” One of the experts said.

According to the Chief Economist at Standard Chartered in London, Razia Khan, a major shift in policy without spelling out the modalities on how to implement it is not wise. “Any real liberalization would be accompanied by some tightening, as a stablilisation measure, at least in the short term which is not so, and very worrying,” he said.

Analysts from Cowry Assets Management Limited said the policy decision would impact the economy on several fronts. “Naira will remain under pressure as market forces adjust the fixed CBN’s clearing inflows from domiciliary accounts estimated at USD20 billion as currency exchange risk minimizes and capital market activities expected to witness gradual recovery as foreign exchange risk diminishes, with the adoption of a more flexible exchange rate regime”

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But analysts at Vetiva Capital Management said inflation may worsen in the near term as a result of the emergence of a new exchange rate to consumer prices. “We expert knee-jerk reaction to push equity and fixed income markets higher in the coming sessions, pending the unveiling of the new framework by the CBN. Any sustainability, thereafter, would be determined by how markets assess the new framework and its prospects of improving forex liquidity.”

In its own reaction, the Lagos Chamber of Commerce and Industry, LCCI, while applauding the decision demanded that the apex should clarify what it described as a special window for critical transactions for which preferential rates will apply.

According to the Director-General of LCCI, Muda Yusuf, the LCCI would like the CBN to clarify the window for critical transactions because of possible abuse and distortions that such windows could create. “We would like to be assured that the window for critical transactions will be managed transparently and in a manner that will not create distortions in the economy”
However, some analysts argued that the decision is long overdue considering dwindling fortune of the naira against the dollar.

Managing Director/CEO, Executive Officer, Highcap Securities Limited, a Lagos base stock broking firm, Mr. David Adorin, said,”They have acted professionally now, because the policy that have been delayed for over a year has finally come to pass. It is better late than never.”

He noted that the decision of the MPC and the CBN to come up with a flexible forex regime, couple with the partial deregulation of the downstream sector are basic policies to address the comatose state of the Nigerian economy from recession and or depression.

President Muhammadu Buhari, hasconsistently been opposed to the devaluation of the naira, but it has long been clear that an exchange-rate adjustment is unavoidable to stop the depletion of Nigeria’s external reserves and to ease the crippling economic effects of capital controls introduced to suppress foreign-exchange demand.

Year-on-year headline inflation rose to 13.7% in April from 12.8% in March and 9.6% in January. In the first quarter of 2016for the first time in more than a decadethe Nigerian economy shrank. Output contracted by 0.4% year on year in real terms, from 2.1.