EVERY economy is normally controlled
by Monetary and Fiscal policies. That
explains why activities recorded in
the financial market is unarguable the
lens through which performance of
the economy could easily be viewed.
Monetary policy initiatives involve
interest rate administration and foreign
exchange management which encompass
both financial market liberalization and
institutional building in the financial
sector.
There is no doubt that the last one year
in Nigeria, the financial sector has been
eventful and resilient. During the period
under review, issues surrounding foreign
exchange market to a large extent shaped
monetary policy particularly when
situated with the slim foreign exchange
earnings as a result of fluctuating price of
crude oil in the international market.
Although in the last one year the average
naira exchange rate remained stable at the
inter-bank segment of the foreign exchange
market which opened at N197.00/US$
and closed at N197.00/US$, with a daily
average of N196.99/US$, but it would
be noted that the level of activity in the
autonomous foreign exchange market as
well as the rising demand in the interbank
market became a source of concern for
the monetary policy authorities. For
instance, it was observed that the data on
demand for foreign exchange was being
overshadowed by speculative demand.
It would be recalled that activities in the
informal segment of the foreign exchange
market led to the stoppage of dollar sales to
BDCs, even as the average naira exchange
rate remained relatively stable at the interbank
segment during the review period.
According to the CBN Governor Godwin
Emefiele “the Bank has been working on
a menu of options to ensure increased
supply of foreign exchange, there was no
easy and quick fix to the foreign exchange
scarcity problem as supply remained
essentially a function of exports and the
investment climate.”
He noted the level of activity in the
autonomous foreign exchange market
especially, following the deregulation
of the downstream petroleum sector
with attendant increased demand in the
interbank market as some of the factors
that have further deepen pressure on the
naira.
Following the issues around the foreign
exchange scenario, the CBN was also faced
with the task of stabilizing the financial
system in the aftermath of the Treasury
Single Account (TSA) withdrawals and J.
P. Morgan delisting of Nigeria.
Consequently CBN signalled the
imperative of reform of the foreign
exchange market in the intervening period
tracing them to the low foreign exchange
earnings of the economy.
It is also important to note the increase in
year-on-year headline inflation to 11.38 per
cent in February 2016, from 9.62 per cent
in January and 9.55 per cent in December,
2015. The increase in headline inflation in February reflected increases in both food and
core components of inflation.
Core inflation rose sharply for the first time
to 11.00 per cent from 8.80 per cent in January
after a lull of three consecutive months at
8.70 per cent through December, 2015. Food
inflation also inched up to 11.35 per cent from
10.64 per cent in January and 10.59 per cent
in December, 2015. The rising inflationary
pressure was traced to the lingering scarcity
of refined petroleum products, exchange rate
pass through from imported goods, seasonal
factors and increase in electricity tariff.
The increase in year-on-year headline
inflation moved to 12.77 per cent and
13.72 percent in March and April 2016,
respectively, from 11.38 per cent in February
2016. The increase in headline inflation in
April reflected increases in both food and
core components of inflation.
Core inflation rose sharply for the third
time in a row to 13.35 per cent in April from
12.17 per cent in March, 11.00 per cent in
February and 8.80 per cent in January having
stayed at 8.70 per cent for three consecutive
months through December, 2015. Food
inflation also rose to 13.19 per cent from 12.74
per cent in March, 11.35 per cent in February,
10.64 per cent in January and 10.59 per cent in
December, 2015.
The rising inflationary pressure continued
to be traced to legacy factors including
energy crisis reflected in incessant scarcity of
refined petroleum products, exchange rate
pass through from imported goods, high cost
of electricity, high transport cost, reduction
in food output, high cost of inputs and low
industrial output.
It is believed that the factors responsible
for rising inflation were more structural in
nature than monetary, but CBN reaffirmed
its commitment to monitor the developments
closely and to work with the relevant
authorities to address the underlying drivers
of the upward price movements.
Money market interest rates reflected the
continuing liquidity surfeit in the banking
system. Average inter-bank call rate, which
stood at 4.50 per cent on 21st March 2016,
closed at 8.67 per cent on March 18, 2016.
Between March 25th and 14th April 2016,
interbank call rate averaged 2.00 per cent.
There was however, improvement in the
equities segment of the capital market as the
All-Share Index (ASI) rose by 3.34 per cent
from 25,899.91 on March 24, 2016 to 26,763.86
on May 18, 2016.
Similarly, Market Capitalization (MC) rose
by 3.14 per cent from N8.91 trillion to N9.19
trillion during the same period. However,
relative to end- December 2015, the indices
declined by 6.56 per cent and 6.70 per cent,
respectively. Globally, however, the equities
markets were generally bearish.
Central Bank of Nigeria, CBN maintained a
tight monetary policy regime with interest rate
that hovers between 12 and 13%. Although
the high interest rate discouraged private
sector borrowing, the apex bank introduced
intervention programmes that were aimed at
bridging the gap.
In view of the foregoing, the imperative
for consistently sound and coordinated
macroeconomic policy has become inevitable.
In the medium term within which monetary
policy is cast, the need to allow policy to
produce the desired outcomes becomes a key
consideration in the policy mix. Consequently,
the Bank is fine tuning the framework for
foreign exchange management with a view
to ensuring a more effective and liquid
foreign exchange market, taking into account
Nigeria’s strategic development priorities;
with the policies being designed within an
environment of regularly ensuring consistency
with monetary and fiscal policies.
Although deposit money banks have
been reluctant to lend to the private sector
the positive side of the story is that there is
continuous liquidity surfeit in the system
stemming partly from the recent growthstimulating
monetary policy measures, as
well as the tendency of the banks to invest
excess reserves in government securities,
rather than extend credit to the needed sectors
of the economy.
However, the apex hank has been
emphasising the need for the deposit money
banks to improve lending to the real sector,
as part of their patriotic obligations to the
country and enjoined the Management of
the Bank to continue to explore ways of
incentivizing lending to employment- and
growth-generating sectors, particularly SMEs.
Experts have also emphasized the necessity
of coordination between monetary and fiscal
policies as a prerequisite for resolving the
nation’s economic problems, particularly,
steering the economy away from oil
dependency.
Particularly stakeholders want the fiscal
authorities to compliment the Bank’s low
interest rate policy orientation by properly
coordinating its borrowing activities (and
rates) with the Bank in order to push the
common objective of stimulating banking
system credit delivery at low interest rates to
the key sectors of the Nigerian economy.
It has also been noted that given the current
economic reality of dwindling oil revenue
and the rather unclear outlook for commodity
prices, there would be need for a recalibration
of the fiscal strategy to increasingly explore
opportunities in non-oil tax revenue.


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