CBN stay hawkish on BDCs, FX arbitrageurs as MPC keeps rates flat

The broad expectations of economic experts from the CBN Monetary Policy Committee (MPC) was not far-fetched after all as the committee moved in the direction anticipated by several analysts who had called a retention of all policy parameters but a softening of its dovish tone, while considering several factors which could keep it reluctant on easing monetary policy stance despite its implication for economic recovery.

This meeting came earlier than usual, almost like an emergency one for this bi-monthly gathering, at the end of which it chose to maintain status quo by leaving the monetary policy rate (MPR) at 11.5 percent, Cash Reserve Ratio (CRR) at 27.50 percent, the Liquidity Ratio (LR) at 30 percent, and the asymmetric corridor at +100/-700 basis points around the MPR for the fifth time this year and after eight meetings under 12 months.

The committee believes that the hold stance will allow the current policy measure to permeate the system and in turn support the growth recovery and macro-economic stability.

This position was in line with the expectations of analysts as the members went into the meeting, many of whom said that the CBN would remain cautious in changing the dynamics of monetary policy direction ahead of global systemic central banks, such as the US Feds and the European Central Bank. In addition, the CBN’s stance also aligned with the thoughts that Nigeria’s fragile GDP recovery and the recent tapering of inflation rate would make a strong case for policy retention in the near term.

Uche Uwaleke, an economic expert and a capital market professor, in a note to Business A.M. had said it would be desirable to keep all policy parameters constant in a bid to spur recovery in the economy.

“I expect the MPC to maintain the status quo and hold all policy parameters. It would have been desirable to reduce the MPR by a few basis points in order to spur economic recovery. But this path may not be taken given the current pressure in the forex market and the widening gap between the official, I&E, exchange rates and the parallel market rates.

“On the other hand, raising the MPR at this time will hurt recovery via increase in cost of capital, especially for SMEs. It will equally slow down the stock market which is still experiencing weak investors’ sentiments,” he concluded.

A major talking point that was on the expectation table going into the meeting was the ban on FX sales to bureaux de change (BDC) operators. At the end of the meeting the CBN maintained its previous stance, and went further to assert that banks have enough foreign exchange supplies to cater for legitimate FX needs.

Given the central bank’s incessant recaps that foreign exchange dealings outside of the official market are illicit, as well as its past hard stance towards the BDCs and parallel market, several analysts had before the meeting maintained that the regulator may remain unwilling to reverse its earlier decision to stop FX sales to BDCs, after the surprising turn of events in July, when that decision was announced by Governor Emefiele in a bid to stop round-tripping and dollarisation of the economy.

Over the last eight weeks from the July meeting of the MPC, the Naira has experienced harsh pressure emanating from FX shortage in the currency market which in turn, has brought about more import pressure on foreign exchange. Thus, the currency dipped to its historic all-time low in more than four decades to N570 for the greenback at the parallel market. The fact that Nigeria is a net importer has brought  even more undue pressure to the FX market. But, this is notwithstanding the fact that the apex bank has assured all and sundry of its move to clean up illicit foreign exchange markets.

According to Godwin Emefiele, “I am sorry to say that I do not, and I do not intend to recognize that there are any other rates in the market. Nigeria’s only recognised rate is quoted at its investors and exporters window, where legitimate FX demands are met. The sale of FX from the reserves, which is our commonwealth to bureau de change operators, is not a global best practice.

“We should really applaud ourselves that we decided that such wrong decisions will stop, and it has stopped for good. Most traders in the BDC segment are encouraging illegal activities and sponsoring banditry in Nigeria due to FX sales to BDCs. If the amount you want is even above the limit that is recognized; that we find out that the reason you are making such [a] demand is legitimate, your bank will speak to us, and we will supply you with what is more than the limit,” Emiefele declared.

Analysts at Cardinalstone Partners, reacting to the development said: “While we expect the outcome of the meeting to drive some cautiousness in the FX market, a lot more will have to be done to curtail the widening premium over Investors and Exporters Window driven by speculation in the parallel market. There is the need for increased FX supply to clear existing backlogs of dollar demand and restore relative calm in the market.”

Also reacting to the development on the halt of FX sales to BDCs, economic analysts at United Capital Research, noted that more pressure will be exerted on the local currency as most Nigerian businesses have no access to FX across markets except from the streets and BDC segment.

“As the official market remains inaccessible to Nigerian businesses that operate in items on the CBN’s FX restriction list, including key imports like rice, clothes and palm oil, the pressure on the parallel market rate will likely persist in the medium term,” they noted.

The recent wave of events in Nigeria’s foreign exchange landscape has shown that some form of imbalances still exists as FX scarcity continues unabated in the foreign exchange market. This is not to forget in a hurry that the spread between the parallel and the I&E market rates, which is perhaps over 20 percent, further buttresses the imbalances in the demand and supply equation .

Some analysts have continued to maintain the position that the current precarious FX situation is exacerbated by spurious demand for forex, activities of speculators and sharp practices, including over-invoicing of products imported into the country.

Bismarck Rewane, chief executive officer of Financial Derivative Company, in a monitored interview some time ago noted that the demand for FX, however, is being driven by emotion, fears and anxiety created by rationing of FX. Rewane maintained that rationing does not help but gives the impression that there is a shortage somewhere.

The expert further noted that the unification of the exchange rate, its parity maintenance and alignment will boost the Naira’s competitiveness against Nigeria’s trading partners. “The exchange rates have not been unified. There are some convergences still taking place. The unification is when you have a single rate. In other words, the demand for foreign currency in Nigeria today is not what it was in normal times and it is a matter of time for everyone to see the outcome of events across markets,” he said.

Meanwhile, whatever policy the apex bank is set to execute in an effort to achieve stability of the Naira against the dollar across markets in consonance with its surprising action of clipping the wings of all BDC operators, the jury is out to establish this position in the coming weeks.