Critics of official intervention in the forex market got a reply yesterday.
The Central Bank of Nigeria (CBN) said its intervention is to bring about a convergence of all the rates.
Many have doubted the CBN’s ability to sustain its intervention, but the CBN insisted that it has the muscle to sustain its battle to stop the Naira from falling out of control.
Addressing reporters at the end of the Monetary Policy Committee (MPC) meeting in Abuja yesterday, CBN Governor Godwin Emefiele warned doubting Thomases that “they are taking a risk and they will lose in this bid to want to place the wrong bet on the direction we are going”. “The direction is that there is determination to see 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 in the foreign exchange market will no doubt be implemented.”
Emefiele noted that “in terms of sustainability, reserves at this time are still trending upwards, almost close to $31 billion as I speak with you, and the fact that we have done this consistently for four to five weeks should convince everybody who doubts the strength of CBN to sustain this policy.”
He went on: “It is a programme that is on course. We are happy that it is looking good beyond our expectations and those who still remain on the sidelines, doubting the CBN’s ability to sustain this policy, they are on the wrong side of the bet.”
Speaking on why the apex bank initiated the intervention, Emefiele said the CBN made a presentation on the Nigerian economy and FX to the National Economic Council (NEC) which thereafter advised that “we look into all the issues discussed.” “Before then, we had started to see the rising trend in the FX, particularly in the parallel market and we had taken a decision that there was a need to reverse the trend that is the reason we specifically started the FX intervention and I am happy it is indeed very gratifying that those interventions have proved positive, we’ve seen rates converging; we are strongly optimistic that the rates will converge.”
On the movement of rate from N305 to N307, Emefiele said the movement “has nothing to do with any adjustment; the market is not one to be fixed; the market will move sometimes based on trends. It is not meant to be a fixed market; it is sort of a floating market that floats within a particular range. It is not an attempt to further weaken the Naira.”
Emefiele said members of the MPC considered the headwinds in the domestic economy and the global environment. They 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.
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.
Before arriving at the decision, the Committee, the CBN governor said, evaluated the challenges confronting the domestic economy and the opportunities for achieving price stability and conducive to growth in 2017.
In particular, the Committee, he said, “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.”
Members, he added welcomed the improved implementation of the foreign exchange policy that resulted in the naira’s 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 and, on the strength of these developments, the Committee felt inclined to maintain a hold on all policy parameters.”
According to Emefiele, “the Committee noted the arguments for tightening policy, which remained strong and persuasive. These include: the real policy rate, which remains negative, upper reference band for inflation remains substantially breached and elevated demand pressure in the foreign exchange market. The reality of sustained pressures on prices (consumer prices and the naira exchange rate) cannot be ignored, given the Bank’s primary mandate of price stability”.
The MPC noted that the moderation in inflation in February was due to “base effect as other parameters, particularly month-on-month CPI, continued to rise. However, tightening at this time would portray the Bank as being insensitive to growth. Also, the deposit money banks may easily reprice their assets which would undermine financial stability. Besides, the Committee noted the need to create binding restrictions on growth in narrow money and structural liquidity and the imperative of macroeconomic stability to achieving price stability conducive to growth”.
Emefiele said “the Committee also considered the arguments for loosening the stance of monetary policy, noting its desirability in stimulating aggregate demand if credit increased with lower rates of interest”.
The CBN governor pointed out that members of the committee considered “the arguments that loose monetary policy was capable of delivering cheaper credit, making it more attractive for Nigerians to acquire assets, thus increasing wealth and stimulating aggregate spending and confidence by economic agents, which would eventually lead to lower non-performing loans in the system. However, the counterfactual arguments against loosening was anchored on the upward trending month-on-month inflation and its impact on the exchange rate. Loosening would thus worsen the already negative real interest rate, widen the interest rate spread and reverse the positive outlook for the current account position.”
On outlook for financial stability, the Committee, Emefiele said, “noted that the banking sector was becoming less resilient as a result of the adverse macroeconomic 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.”

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