By Blaise Udunze
FOLLOWING the introduction of a new fuel price regime by the Federal Government, experts have pushed for an upward review of the official exchange rates from the current N197 to N275-N285 to a dollar, as Monetary Policy Committee(MPC) of the Central Bank of Nigeria(CBN) commences their meeting today.
This is coming against the backdrop of sustained pressure on domestic output and elevated headwinds in the economy. Key indicators in the economy continue to worsen on the back of prolonged foreign exchange (FX) supply bottlenecks, delayed budget implementation, petrol market crisis, galloping inflation; which is dragging consumer spending, negative gross domestic product (GDP) growth rate and weaker corporate earnings.
However, financial experts said the recent policy pronouncement by the Minster of State for Petroleum Resources,Ibe Kachikwu, on guided deregulation of the petrol market is expected to take the centre stage given the impact on key monetary policy variables going forward. The Naira remains weak because of the excess demand over supply. Following the announcement of a new pump price, the value of the Naira depreciated further at the parallel market by 9.58per cent to N355/$ as at May 16, from N321/$ before the announcement of the increase in fuel price.
Latest GDP numbers released by the National Bureau of Statistics (NBS) indicates that Q1:2016 GDP contracted to 0.36per cent Y-o-Y (as against 3.94per cent growth in Q1:2015) as structural challenges in the system bites harder. Meanwhile, Consumer Price Index (CPI) for April released earlier in the week indicated that inflation rate galloped to 13.7per cent in April, 2.3per cent point higher than 11.4 per cent in February, just before the last MPC meeting.
Persistent rise in prices remained driven by lingering structural constraints in the economy as electricity rates, kerosene prices, vehicle spare parts, other import products and prolonged petrol crisis drove core inflation to 13.4per cent while food inflation settled at 13.2per cent. As a result, real interest rate worsened to -1.7per cent in April from -0.8per cent in March.
Analysts at Afrinvest, led by its Head, Investment Research Department, Ayodeji Ebo, is of the view that “MPC may adopt a more flexible exchange rate policy that will close the spread between the official/interbank market rate and the N285/$ rate assumed by the Petroleum Products Pricing Regulatory Agency (PPPRA) in its pricing template.
According to him, this is to reduce the pressure on the parallel market rate which has already been endorsed by the pronouncement of the Nigerian National Petroleum Corporation (NNPC).
The analysts, however, expect removal of the restrictions earlier imposed on 41 items allowing for flexibility of interbank market and choosing when to intervene if need be.
However, the firm stated that the implications on the part of the MPC failing to fix the currency market crisis would, “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 further pressure on the general price levels, ultimately defeating the objective of price stability.”
