CBN to introduce flexible exchange rate policy

In a bid to stave off recession in the economy, the Central Bank of Nigeria (CBN) is to adopt a flexible exchange rate policy.

This, the Monetary Policy Committee (MPC) yesterday said, is to restore the automatic adjustments properties of the exchange rate.

Addressing journalists at the end of the bi-monthly MPC meeting in Abuja, CBN Governor Godwin Emefiele said: “The foreign exchange market framework is now ready. The MPC voted unanimously to adopt greater flexibility in exchange rate policy to restore the automatic adjustment properties of the exchange rate. Consequently, all nine members voted to hold and introduce greater flexibility in managing the foreign exchange rate.”

The MPC, in its assessment of the relevant risk profiles, Emefiele said: “came to the conclusion that although the balance of risks remains tilted against growth; previous decisions need time to crystalise. Consequently, in a period of stagflation (price rising continuously without corresponding increase in jobs), the policy options are very limited. To avoid complicating the conditions, the Committee decided on the least risky option to hold.”

The least risky option, he said, is the adoption of a flexible foreign exchange rate. However, the CBN “would retain a small window for funding critical transactions. Details of operation of the market would be released by the CBN in a few days time, the CBN governor said.

“Critical transactions,” according to the CBN Governor, include foreign and local investments in manufacturing and importation of equipment purely for basic raw materials with very low altitude call content.”

Commenting on the state of the economy, which Emefiele warned was heading towards recession, the CBN governor lamented that “headline inflation spiked in April 2016, far above the upper limit of the policy reference band”. “Inflation has continued to be driven mainly by supply side factors, such as fuel scarcity, increase in tariff and deterioration in electricity supply, increase in the price of petrol, higher input costs as a result of scarcity of foreign exchange, persistent security challenges and exchange rate pass-through to domestic prices of import.”

The Committee, in July 2015, had hinted on the possibility of a recession, unless complementary measures were taken by the monetary and fiscal authorities. Unfortunately, Emefiele said, “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, he said, has 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.”

Policy actions, Emefiele said, “have to be predicated on a less optimistic outlook for the economy in the short term, given that, even after the delayed budgetary passage in May 2016, the initial monetary injection approved by the Federal Government may not impact the economy soon, as the processes involved in MDAs finalising procurement contracts before the disbursement of funds may further delay the much-needed financial stimulus to restart growth”.

While the MPC believed that the recent deregulation of the downstream sector of the petroleum sector was in the right direction and would lead to increased supply, members of the committee noted that “the pass-through effect of prices to other products has to be factored in policy considerations”.

“Mindful of the limitations of monetary policy in influencing structural imbalances in the economy, the Committee stressed the need for policy coordination with the fiscal authorities in order to effectively address the identified pressure points.”

The Committee noted that the CBN had implemented accommodative monetary policy from July 2015, with the hope of achieving growth, up until March 2016, when the MPC switched into a tightening mode. However, while the underlying conditions necessitating tight monetary policy remained largely in place, sundry administrative measures implemented by the CBN and recent macroeconomic conditions on the back of the 2016 Budget are expected to significantly dictate a key policy preference in the dilemma now faced by monetary policy – stagflation.

Given the current limited policy space, Emefiele said it has become “imperative to balance stability with growth stance while working on options that, in the short term, are certain to isolate seasonal and transient factors fuelling the current price spiral.”

Other decisions reached at the end of the meeting include to retain Monetary Policy Rate (MPR) at 12.per cent; the Cash Reserve Ration (CRR) at 25 percent; Liquidity Ratio at 30per cent; and Asymmetric Window at +200 and -500 basis points around the MPR.