CBN Rules Out Naira Devaluation, Retains MPR At 13%

The Monetary Policy Committee of the Central Bank of Nigeria on Friday retained the Monetary Policy Rate at 13 per cent with a corridor of +/- 200 basis points around the midpoint.
It also ruled out the possibility of devaluing the nation’s currency following the recent pressure on the naira from the foreign exchange market.
The committee said the naira was appropriately priced, noting that developments in the financial market would be closely monitored within the coming weeks.

The 12 member committee at the end of its meeting, which was held at the apex bank’s headquarters in Abuja, also retained the Cash Reserve Requirement at 31 per cent.

Addressing journalists shortly after the two-day meeting, the CBN Governor, Mr. Godwin Emefiele, said the committee took the decisions after considering a lot of factors.

He said some of them are the underlying fundamentals of the economy, the evolving international economic environment, developments in the global oil market as well as the need to allow for the unveiling of the economic agenda of the Federal Government.

He said the committee members decided by a vote of eight to four to retain the MPR at its current level of 13 per cent and also unanimously voted to retain the CRR at 31 per cent.

The governor said the committee was concerned about the trends in key macroeconomic indices in the first half of 2015, adding that while it acknowledged the absence of easy choices in the circumstance, the efficacy of monetary policy alone in addressing the problem was limited.

In order to reposition the economy, he said there was need for urgent complementary fiscal policies to define the path of growth and create the basis for stabilisation.

On the external front, he said the adverse effect of the protracted decline in global crude oil prices on the fiscal position of government was becoming increasingly obvious.

For instance, he said the expected policy normalisation in the United States could accentuate capital flow reversals from emerging and developing economies and further tighten global monetary conditions.

He said, “Given the choice between controlling either quantity or price, the limitations on choosing quantity were evident necessitating the need to employ some flexibility around price while allowing current demand management measures to fully work their way through the economy.

“The committee however noted that financial system stability considerations placed key limitations on the extent of considering price flexibility, creating a compelling need to balance measures to address the current vulnerabilities.

“On inflation, the committee stressed that some of the drivers of the current pressure on consumer prices were transient and outside the direct influence of monetary policy.

“Pressure on food prices is expected to gradually wane as the planting season gives way to harvests in the months ahead. Early resolution of fuel scarcity would dampen transportation costs and improve food distribution across the country, while improvements in electricity supply could steady output at lower costs.”

The governor said overall, the committee expressed optimism that business confidence would continue to improve as government continued to unfold its economic plans.

He noted that some of the reassuring measures of the administration, including efforts aimed at resolving fiscal challenges at the sub-national levels, and the fight against corruption and improving the business environment, would unlock the inflow of foreign direct investment.

Emefiele said the committee also underscored the imperative of growing and protecting the country’s foreign reserves and building fiscal buffers in the process of strengthening confidence in the economy, which is essential for promoting growth and stability.

According to him, gross official reserves increased from $28.57bn at end-May 2015 to 31.53bn as at July 22, 2015, reflecting the blockage of leakages as well as the bank’s management policies.

He said since more than 95 per cent of foreign exchange transactions in the financial market were done through the interbank market, it would be wrong for people to judge the performance of the naira against the dollar at the Bureau De Change market.

He said, “More than 95 per cent of transactions in the financial market that involve buying and procuring of forex happens at the interbank. Statistics have shown that most of the transactions that happen at the parallel market, rather than being for retail trade, are people doing transactions for what we termed as illicit business.

“And for that reason, I continue to wonder why people will begin to use the BDC rate which constitutes an infinitesimal volume of transactions at the foreign exchange market as a basis to determine exchange rate and we do not consider that market as a major market in the foreign exchange market.

“We had done depreciation of currency by 22 per cent from N155 to N197 that it is today. We cannot continue to adopt an indeterminate depreciation of our currency because of its impact on our people given that this is a heavily import dependent economy. So the naira is appropriately priced and we will continue to monitor the situation and in the cause of tine if there is any need to change our position, we will let you know.”

On the bailout package to state governments, Emefiele said the over 50 per cent drop in revenue, coupled with the fact that most of the states were weighed down with wage bill, there was need to address the situation.

He said since the general belief that a labourer was entitled to his wage, there was need for the bank to step in as a lender of last resort to the government by providing funding to address the situation.

He, however, said the amount to be provided would be in form of a loan and not a grant to the states, noting that this would help to stimulate economic activities.

July 25, 2015