Naira falls after CBN MPC decisions

.           Flexible exchange rate policy will stabilise naira, financial experts insist

FELIX OLOYEDE
Less than 24 hours after the Central Bank of Nigeria (CBN) monetary policy committee (MPC), decided to employ a flexible exchange rate system, the naira depreciated on Wednesday.

The naira depreciated from 344 to the dollar at the parallel market in Abuja on Tuesday, to 347 against the greenback.

In Lagos, the naira plunged from 347 and 350 against the dollar, while the British pound kept hovering around N495.

On the official side however, the naira remained unchanged to the dollar, with the CBN peg at 197, while the pound moved from 285 to 288. The Euro appreciated to 221 to 220.

The Nigerian Stock Exchange (NSE), however responded positively to the MPC decisions, with the all share index (ASI) rising from 27,232 on Tuesday to 28,164 at 2pm on Wednesday.

MPC on Wednesday warned of an imminent recession, saying the bank would work on a flexible exchange rate regime.

“The committee expressed concern over sustained pressure in the foreign exchange market and the necessity of implementing reforms to engender greater flexibility of rate and transparency in the operation of the inter-bank foreign exchange market,” Godwin Emefiele, governor of the bank, said.

“Accordingly, the committee noted that it was time to introduce greater flexibility in the management of the foreign exchange market. The committee reaffirmed commitment towards maintenance of price stability and reiterated the need to reappraise the coordination mechanism between monetary and fiscal policy and initiate reforms, for the purpose of more efficient policy synchronization and management.”

The MPC said the monetary policy rate (MPR) and cash reserve ratio (CRR) would remain at 12 percent and 22.5 percent respectively. Liquidity ratio was also held at 30 percent.

Meanwhile, two financial houses on Wednesday lauded the flexible exchange rate policy adopted by the Central Bank of Nigeria (CBN), saying it would boost forex liquidity and stabilise the Naira.

In two separate statements obtained by BH, Vetival Capital Management Ltd. and Cowry Asset Management Ltd., both in Lagos, said the development indicated CBN’s acceptance of market realities.

They also said that the decision would lead to increased dollar inflow in few days.

It would be recalled that the Monetary Policy Committee (MPC) in its 107th meeting on Tuesday voted to adopt a flexible foreign exchange policy.

It also retained Monetary Policy Rate (MPR) at 12 per cent, Cash Reserve Ratio (CRR) at 22.5 per cent and liquidity ratio at 30 per cent.

The Head, Research, Vetival Capital Management Ltd., Mr Pebina Yinkere, was quoted as saying that the policy would curb profiteering in the system.

Yinkere also said that the policy would improve foreign exchange liquidity in the system.

“Overall, we view this development as positive for Nigeria,” Yinkere added.

Cowry Asset Management Ltd. said the policy would impact on the economy in several ways.

It said it expected the current inflationary pressure to continue unrestrained as budgetary disbursement commences.

According to the firm, interest rate is expected to continue to hover at current levels with an increased double digit outlook.

“This is likely to increase in liquidity mop-up through Open Market Operations (OMO) in response to expected increase in budgetary spending.

“The Naira might remain under pressure as market forces adjust to a more realistic parallel market rate.

“The decision would likely attract foreign exchange inflows estimated at 20 billion dollars from domiciliary accounts as currency exchange risk minimises,” it said.

It added that capital market activities would witness gradual recovery as foreign exchange risk diminishes.