The Central Bank of Nigeria (CBN) has been under pressure lately to devalue the naira against the US dollar. Currently the naira exchanges at about N197 to the dollar officially but sells for between N300 and N350 at the street market.
Last week, petroleum subsidy was lifted and the downstream sector deregulated; oil importers are also required to source their forex needs in the parallel market or other markets far removed from government official forex rate as oil imports consume about 70 percent of the forex demands.
But the forex market has reacted sharply to the new regime. Analysts have said, effectively the naira has been devalued since the oil importers will source forex at the parallel market and since oil import accounts in excess of 70 percent of the forex demand curve.
Thus, as the CBN monetary policy committee meets today and tomorrow, experts say the forex market and inflation would top discussions.
The CBN, at the last MPC meeting, hiked bench mark interest rate to 12 from 11 percent, in response to headline inflation put at the time at 11.38 per cent. That policy direction seemed not to yield significant result as inflation went up to over 13.7 percent in April.
Commenting, Mr. Rislanudeen Muhammad, the Senior Fellow and Monetary Policy Lead at the Institute for Fiscal Studies Nigeria (NIFS), said definitely the MPC would be in a difficult situation as they meet.
“With little or no fiscal buffer, weak reserve, weak forex earnings in an import dependent economy, underlying imperative for devaluation was well documented. However CBN may still not devalue for political not economic reasons,” he noted.
He said while 2016 fiscal budget was rightly expansionary, geared towards stimulating the economy, MPC headed towards monetary tightening to attack inflation by jerking up MPR and CRR at its last meeting, implying increased cost of borrowing and a negation of single digit interest rate envisaged in the 2016 fiscal budget.
“That decision has not achieved desired objective as April inflation has gone up to 13.7 percent and GDP growth rate for first quarter 2016 headed to negative -0.36 percent and unemployment rate up to 12.1 percent. One quarter of negative GDP growth implies one leg effectively in recession,” he noted.
The former acting MD of Unity Bank also said “indeed even if GDP growth is positive but lower than population growth as obtained whole of 2015, it implies accentuation of poverty.
“Without tinkering with exchange rate which will help in improving liquidity, transparency and confidence in the market, all other monetary instruments adopted by MPC may not effectively deal with the challenge in forex market. Trading off growth to attack inflation may also be at variance with 2016 expansionary fiscal budget aimed at reflating the economy and achieving single digit interest rate.
“The MPC and its monetary policy alone cannot address the underlying contradictions in the Nigerian economy today. Rather there is urgent need for synchronisation of fiscal and monetary policies to achieve real growth. As for now they seem to have inverse objective,” he said.
Mr Manz Denga, the chairman of AfriBusiness ExpertEase (AfBEE) in Johannesburg, South Africa and the chairman, Treasure Capital, a Lagos-based investment advisory firm, explained that “foreign exchange is an essential part of overall macroeconomic policy tools that can be used to push economic growth, when applied with the intent to attract foreign resources to finance domestic gaps in the economy.
“However, for the tool to be effective there must be liberalisation and not controls,” he said