Thoughts on CBN’s policy measures to address Forex concerns

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Friday, June 26, 2015 16:18 PM / DLM

Nigeria’s economy is sensitive to oil price shocks, to the extent that any development in the domestic and international oil markets has a ripple effect on most macro-economic indicators. In view of the aforementioned, the naira has come under immense pressure which has been largely sustained since August 2014 with the apex bank implementing strategies in a bid to maintain exchange rate stability. We note the various policy measures that have been introduced by the CBN in recent months to ease the significant pressure on the naira with the movement of the midpoint of the official window of the foreign exchange market to N168/$1 in November 2014 and the closure of the RDAS/WDAS foreign exchange window in February 2015 being noteworthy. The closure of the RDAS/WDAS in our view offered some respite to the financial markets and significantly slowed down the rate of depletion of reserves - significantly lower than the rate of depletion of 13.12% seen between January and March 2015. We also observed a slight accretion to the external reserves in May 2015 as it rose on a month-on-month basis for the first time in nine months.


Renewed pressure on the naira yet again with the resultant increased funding of the foreign exchange market raising concerns on weakening external reserves. We note the renewed pressure on the naira in recent weeks which has exacerbated the depletion of the nation’s external reserves as the CBN remains keen on defending the naira. This is further supported by the fact that external reserves have steadily declined in the last one month to current level of $29.03billion – the lowest in over 54 months considered. The weakening of fiscal buffers raises significant concerns as it increases the economy’s reliance on portfolio flows which is a key driver of risk of exchange rate stability.


Key highlights of the recent CBN circular. In a circular released by the CBN on the 23rd of June 2015, importers of selected goods and services (41 items) were excluded from accessing foreign exchange at the Nigerian foreign exchange markets. They include: rice, cement, margarine, palm kernel/ palm oil products/ vegetable oils, meat and processed meat products, poultry - chicken, eggs, turkey, private airlines/ jets, furniture, toothpicks, textiles, woven fabrics, clothes, plastic and rubber products, soap and cosmetics, tomatoes/ tomatoes paste and euro bond/ foreign currency bond/ share purchases amongst others. We believe this is in reaction to the increasing demand for foreign currency from the CBN which increases the funding of the foreign exchange market and invariably the rapid depletion of the nation’s reserves.

Whilst we understand the rationale of this move considering the huge amount of foreign currency needed to facilitate these transactions given that Nigeria largely remains an import-dependent economy, we believe that it presents a scenario of a possible diversion to the parallel market as these firms strive to remain in business. Consequently, this will likely raise rates at the parallel market and induce inflationary pressures in the short-to-medium term which further reinforces our position that inflation would hover around the lower double digit range by the end of 2015. Presently, Nigeria is one of the largest importers of food in the world, spending an estimated N1.3 trillion annually importing wheat, rice, sugar and fish.

Therefore, policy effectiveness in our view will also be largely hinged on the significant increase in domestic production to meet teeming demand of these goods to prevent demand-pull inflation.

In view of current economic realities, how much longer before the inevitable? In our opinion, these policies portray the hesitancy of the apex bank to devalue the naira which is commendable but we note that possible options have become limited. We maintain our position of a further devaluation of the currency in the current year to ease the rapid depletion of the reserves.


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