CBN meets over volatile naira, interest rate

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CBN meets over volatile naira, interest rate

CBN meets over volatile naira, interest rate
July 24
06:28 2016

•Lifts ban on forex sales to BDCs

The Monetary Policy Committee (MPC) is set to review recent developments in the global and domestic economy at a crucial two day meeting commencing tomorrow in Abuja.

Topping the agenda for the meeting is the volatility of the naira in the parallel market in the aftermath of the introduction of the flexible forex policy regime, likely interest rate hike, and rising inflation.

Ahead of the meeting, the Central Bank (CBN) has lifted the ban on forex sales to bureaux de change (BDC) operators.

In a circular to authorized dealers, the CBN Acting Director, Trade & Exchange ,W.D Gotring, said the policy shift would ensure the stability of the exchange rate and boost participation of all critical stakeholders in the foreign exchange market.

The MPC meeting is coming against the backdrop of fears about the global economy, sustained sub-optimal domestic economic performance and declining economic growth and consumer purchasing power.

Analysts believe the MPC will likely be weighing options on the exchange rates in view of rising fiscal constraints.

Managing Director, Afrinvest West Africa Limited, Ike Chioke, said the International Monetary Fund (IMF) projected a 1.8 per cent contraction of the Nigerian economy in 2016, a 4.1 per cent downward revision from 2.3 per cent estimated in April.

Besides, the June 2016 economic data to be released next month would confirm the economy to be in a recession.

Chioke wants the MPC to be more proactive than reactive in its response to challenges in the economy.

“The need to regain investor confidence in the aftermath of the newly launched forex framework should be a paramount item on the agenda of the MPC,” he said.

He expects the MPC to raise interest rate by 100 basis points to 200 basis points and keep other rates constant to attract portfolio capital inflows which is yet to respond to currency market flexibility.

“We believe the CBN will adjust benchmark policy rate to reflect this tight policy thrust, thus completing its policy back flip by taking the first option tomorrow and next. We believe taking this route will aid the CBN in stabilising the forex interbank market and buy some time for fiscal and monetary authorities to engage in more long term structural reforms to buoy competitiveness,” he predicted.

The analyst said that since the last MPC meeting, volatility in the global economy has been amplified by Britain’s decision to exit the European Union (EU) at the tail end of last month.

He said rising inflation, bearish second quarter 2016 growth outlook, weak credit expansion to the private sector, rising level of banks’ non-performing loans and volatility in the forex market have continued to pressure domestic economy and financial market.

“The feedback effect of reforms in the energy sector has taken a further toll on price level as June inflation rose to 16.5 per cent in amid higher fuel prices and electricity tariff. The implementation of the floating exchange rate regime in the currency market triggered a 41.1 per cent depreciation of the naira as the equities market year-to-date return rose to seven per cent in anticipation of the return of foreign players,” he said.

Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, said the MPC will be closely monitoring the inflation data. He said a precipitated move such as lowering rates is an unlikely outcome at tomorrow’s meeting.

“The market is still digesting the impact of the N1.3 trillion debit for the $4.02 billion forward sale of forex,” he said.

Chief Economist, Africa at Standard Chartered Bank, Razia Khan, said inflation remains pressured despite the Central Bank of Nigeria’s (CBN’s) liberalised forex regime which took off last month.

She said the CBN’s monetary tightening intent is likely to come under scrutiny adding that the requirements for forex liberalisation may supersede banking-sector and wider economic concerns.

In the circular entitled Sales of Foreign Currency Proceeds of International Money Transfers to Bureaux De Change Operators announcing the lifting of the ban on forex sales to bureaux de change (BDC) operators, Gotring said the policy shift would ensure the stability of the exchange rate and boost participation of all critical stakeholders in the foreign exchange market.

The CBN had in January this year, stopped all forms of forex sales to BDCs, accusing the operators of round tripping and frustrating the policies meant to stabilize the naira.

But despite the stoppage of dollar sales to BDCs, the local currency has continued to depreciate, and was exchanging at N305 to dollar in the parallel market as at yesterday and N378 to dollar in the parallel market.

Gotring has now directed all authorised dealers who are agents to approved International Money Transfer Operators to sell foreign currency accruing from inward money remittances to licenced Bureaux De Change Operators (BDCs) with immediate effect.

He explained that all International Money Transfer Operations are required to remit foreign currency to the agent banks for disbursement in naira to the beneficiaries while the foreign currency proceeds shall be sold to the BDCs.

“The foreign currency proceeds of International Money Transfer sold to BDC operators shall be retailed to end-users in compliance with the provisions of Anti-Money Laundering Laws and observe the appropriate Know Your Customer principles, including use of Bank Verification Numbers (BVNs)”.

Furthermore, he urged authorised dealers and BDCs to render returns on their operations daily and monthly to the CBN through the Electronic Financial Audit Sub-System (e-FASS) application in accordance with extant regulation, failure which there would be sanctioned, including withdrawal of dealership licence.

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