…Keeps MPR, others unchanged •Naira weakens to N346
By Isaac Anumihe, Adewale Sanyaolu and Blaise Udunze
The Monetary Policy Committee (MPC) meeting of the Central Bank of Nigeria (CBN) ended yesterday with a decision to retain the Monetary Policy Rates (MPR), with indicators that the economy was on the throes of an imminent recession following the late passage of 2016 budget.
The Governor of the apex bank, Godwin Emefiele, who read the communique said that the conditions that led to the contractions in the first quarter of 2016 were still largely unresolved.
According to him, the recession, which was signalled in July 2015, now appears imminent.
Emefiele, who spoke on behalf of the committee, said the previous decisions of the MPC needed time to crystallise, hence, there was no need for adjusting rates.
Explaining the reasons for the MPC decision, he said, “the committee acknowledged the severely weakened macroeconomic environment as reflected particularly in increased inflationary pressure, contraction in real output and rising unemployment.
“The committee recalls that in July 2015, it had hinted on the possibility of the economy falling into recession unless appropriate complementary measures were taken by the monetary and fiscal authorities. Unfortunately, the delayed passage of the 2016 budget constrained the much desired fiscal stimulus, thus edging the economy towards contractionary output.
“As a stop-gap measure, the central bank continued to deploy all the instruments within its control in the hope of keeping the economy afloat. The actions, however, proved insufficient to fully avert the impending economic contraction. With some of the conditions that led to the contraction in Q1, 2016 still largely unresolved, the weak outlook for growth which was signalled in July 2015 could extend to Q2,” he said.
According to Emefiele, the decision as the least risky option, the committee asked the CBN to work on a flexible exchange rate system with no mention of devaluation.
The bank said the MPR and cash reserve ratio (CRR) will remain at 12 per cent and 22.5 per cent respectively and liquidity ratio at 30 per cent.
The MPC had asked the bank to adopt a flexible exchange rate system to allow for inflow of foreign exchange and needed investment.
“The committee said in the period of stagflation, the options are very limited; the committee decided on the least risky option. The MPC voted unanimously to adopt a flexible exchange rate policy.”
Emefiele said the apex bank would unveil plans for the flexible exchange rate system in the course of time, adding that the implementation of budget 2016 will further reflate the contracting economy.
Meanwhile, the naira weakened slightly in the parallel market on Tuesday, as it was quoted at N346 to the dollar on the parallel market, from N345 at Monday’s close.
Also, the nation’s foreign reserves fell 2.7 per cent to $26.56 billion by May 20 from a month earlier, even as CBN disclosed plans to raise N143.85 billion ($722.86 million) worth of treasury bills with maturities ranging between three months and a year on June 1.
The apex bank will issue N45.85 billion of three-month debt, N18 billion in the six-month paper and N80 billion of one-year bills in a Dutch auction.
“Each bid must be in multiple of N1,000 subject to a minimum of N10,000,” the CBN said in a public notice. Allotment letters are to be issued to successful bids on June 2.
Speaking with Daily Sun, the Managing Director of Cowry Asset Management, Johnson Chukwu, commended CBN for its decision to maintain the rates for the stability and growth of the economy.
He, however, stated that under the current challenging economic conditions where there are severely weakened macroeconomic environment, as reflected particularly in increased inflationary pressure, contraction in real output and rising unemployment any movement or change would worsen the economic situation.
The President of the Association of Bureau de Change Operators of Nigeria (ABCON), Aminu Gwadabe, noted that the flexible foreign exchange policy of the apex bank is expected to bring liquidity to the interbank and effectively impact the parallel market.
Gwadabe said improved liquidity at the interbank market will help converge its rate with that of the BDCs and eventually allow the local currency gain strength at the parallel market.
He noted that considering the level of the reserves, it had been envisaged that the CBN will not open its windows to BDCs but it had been hoped that the apex bank will allow BDCs access foreign exchange from the banks.
He, however, noted that the naira remained relatively stable and is expected to gain strength in coming days once the CBN issues circular to effect the flexible forex policy.