- To adopt flexible policy
Governor of Central Bank of Nigeria, CBN, Godwin Emefiele has disclosed that the Monetary Policy Committee, MPC, has decided that the bank should embrace some level of flexibility in the foreign exchange market in order to keep the economy afloat, given the hard-biting scarcity of foreign exchange.
He stated this yesterday in a press briefing after the bi-monthly Monetary Policy Committee, MPC, meeting held in Abuja.
The CBN governor said that despite frantic efforts the apex bank had been making 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.
“Given the imperative for growth, the management of the bank has been given the mandate to work out the modalities for achieving the desired flexibility that is in the overall interest of the Nigerian economy and when the implementation of the new framework would begin,” he said.
He, however, added that the committee recognised the exchange rate as a very important macroeconomic variable, which must be earned by increased productive activity and exports, noting with satisfaction that the bank had made very significant and satisfactory progress with the reforms framework.
According to him, “In the committee’s opinion, the key issue remains how to increase the supply of foreign exchange to the economy. The committee noted that it was time to introduce greater flexibility in the management of the foreign exchange market.”
He stated that the Monetary Policy Rate, MPR, was retained at 12.00 percent; the CRR at 22.50 percent while the Liquidity Ratio remained 30.00 percent.
Other monetary policy outcome was that the Asymmetric Window was put at +200 and -500 basis points around the MPR.
Also in the event of introducing greater flexibility in the inter-bank foreign exchange market structure, the apex bank decided to retain a small window for critical transactions.
Emefiele admitted that as much as dynamic foreign exchange management framework that guarantees flexibility could not replace the imperative for the economy to increase its stock of foreign exchange through enhanced export earnings, such a structure must evolve to provide basis for radically improved investment climate to attract new investments.
The committee was of the view that the current adverse global and domestic economic and financial conditions and the imperative imposed by the demand and supply shocks to the domestic economy, and considering the express intensions of government as enunciated in the 2016 budget, policy must respond appropriately as the market continues to demonstrate confidence in the bank’s ability to deliver a credible foreign exchange market.
While the committee believed that the recent deregulation of the downstream sector of the petroleum sector was in the right direction and would lead to increased supply, the pass-through effect of prices to other products has to be factored in policy considerations.
He also stressed the need for policy coordination with the fiscal authorities in order to effectively address the identified pressure points in the limitations of monetary policy in influencing structural imbalances in the economy.
He further explained that in the first quarter of 2016, the economy suffered from severe shocks relating to energy shortages and price hikes, scarcity of foreign exchange and depressed consumer demand, among others.
Consequently, economic agents could not undertake new investments or procure needed raw materials.
Shortage of foreign exchange arising from low crude oil prices manifested in low replacement levels for raw materials, other inputs as well as new investments.
According to him also, the prolonged budget impasse denied the economy the timely intervention of complementary fiscal policy to stimulate economic activity in the face of dwindling foreign capital inflows.
Aggregate credit to the private sector remained highly tapered while credit to government grew beyond the programmed benchmark for the period.
The committee, however, noted that many of the prevailing conditions in the economy during the review period were outside the direct control of monetary policy, but hopes that the implementation of the 2016 federal budget, supported by relevant sectoral policies and easing supply shocks in energy and critical inputs, would provide the needed boost to the economy.
The committee observed with concern the continuous dismal performance of growth in credit to the private sector, noting that in spite of the bank’s efforts, DMBs continued to direct credit largely to low employment elastic sectors of the economy, a phenomenon that had significantly contributed to the low performance of the economy.