MPC at a crossroads, begins deliberation today

…as analysts calls for flexible exchange rates

BY ODUNEWU SEGUN

WITH the Central Bank of Nigeria’s Monetary Policy Committee commencing its 205th meeting today to review global and economic developments within the last 2 months, analysts at Afrinvest have task the committee on the need to adopt a complimentary monetary policy to forestall negative impact of a weaker exchange rate in the parallel market.

This is coming against the backdrop of sustained pressure on domestic output and elevated headwinds in the economy.

In its weekly update, Afrinvest said with key indicators in the economy continue to worsen on the back of prolonged FX supply bottlenecks, MPC should adopt a more flexible exchange rate policy that will close the gap between the official/interbank market rates.

Analysts at Afrinvest also advises the MPC to remove the restrictions earlier imposed on 41 items that were excluded from accessing FX at the official/interbank market and allow the fiscal authorities to impose an appropriate trade policy in line with the agenda of the government.

“If this is not done, a currency adjustment would aggravate the situation as the demand pressure from oil marketers and the banned 41 items could cause parallel FX market rate to skyrocket. It would be proactive, if the Committee frontloads inflation expectation into MPR in anticipation of higher prices. Thus, we assume that MPC could set MPR at 15.0% to ensure positive real return in the interim,” it stated in its weekly update.

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“We believe that if the Committee leaves MPR unchanged, allowing the market to find its true yield, but concentrating on its OMO mop-up strategy of controlling liquidity, the result may be more absorptive for the economy. Therefore, the dilemma for the Committee would then be to either increase MPR to 14.0% or 15.0% in addressing negative real return problems and risk higher cost of credits to both government and businesses or allow the market set interest rate and risk inconsistency in policy.”

According to Afrinvest, the recent move by NNPC to deregulate the downstream petrol market comes with serious monetary policy implications. “Oil marketers are now allowed to freely import fuel and to approach autonomous sources rather than the CBN for their FX needs. This has been broadly speculated to prompt the Apex bank to bite the bullet and allow the naira find its true value in the official market.”

In its weekly update, Afrinvest said failure on the part of the MPC to fix the currency market crisis will widen the spread between interbank and parallel FX markets, create more opportunities for arbitrage Increase the pump price of petrol in the PPPRA price modulation template and as well as creating further pressure the general price levels, ultimately defeating the objective of price stability.