Monetary Policy | |
Monetary Policy | |
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Monday,
March 23, 2020 /02:31 PM / by ARM Research / Header Image
Credit: Facebook; @Cenbankng
The Monetary Policy Committee (MPC) is set to meet
again amid a global epidemic of the Covid-19 virus which has rocked global
markets. At its meeting in January, the MPC hiked the Cash Reserve Requirement
by 500 bps to 27.5% in order to curtail the impact of liquidity influx from FI
maturity. Now, the CBN is faced with a double whammy of stimulating growth and
maintaining FX stability following the impact of Covid-19 on economic
activities and global oil prices.
On FX, the CBN has been embattled with lower oil
inflows as well as significant repatriation of foreign flows. Just within the
first two weeks in March, the CBN had to intervene to the tune of $1.8 billion
at the IEW. Balance of flows at the IEW is currently printing at a net outflow
of $1.7 billion in March (February: $1.5 billion). In response to the
underlying pressure, the CBN made a couple of adjustments to the exchange rates
last week. Firstly, the official interbank rate was adjusted to N360/$ from
N306/$. In addition, the following rates were also revised from the prevailing
rates of N360 - N365/$: IMTOs to Banks - N376/$1, Banks to CBN - N377/$1, CBN
to BDCs - N378/$1, BDCs to end-users - Not more than N380/$1.
Elsewhere, the CBN has also adopted some measures to stimulate growth which includes:
i. Extension
of principal moratorium on CBN intervention facilities by one year. In
addition, the rates on all facilities were reduced from 9% to 5% effective
March 1, 2020.
ii. Extend
its intervention facilities to the pharmaceutical companies, hospital and
healthcare practitioners as well as increasing the size of intervention
facilities to the agricultural and manufacturing sectors.
iii. Creation of a N50 billion credit facility for households and SMEs that have been particularly hit by Covid-19.
iv. Allow
banks to consider temporary and time-limited restructuring of the loan tenor
and terms for businesses and household most affected by the outbreak of
Covid-19, particularly to the Oil & gas, agriculture and manufacturing
sectors.
v. Encourage
banks to maintain credit to individuals and businesses as well as considering
incentives to banks to give out longer tenured facilities.
vi. Establishment of a N1.1 trillion intervention fund to support critical sectors of the economy.
Overall, we think the CBN is torn between achieving two conflicting objectives - stimulating growth and maintaining FX stability. For context, while the CBN has embarked on interventions which would increase system liquidity, it is also trying to avoid pressure on the naira via the influx of naira liquidity. Consequently, we expect these two objectives to be major focus at the meeting. In our view, maintaining FX stability would be of utmost importance; however, we do not expect the tactical devaluation by the CBN to keep FPIs given the current global risks and the case of a much-needed single FX rate policy which remains aloof. At best, we expect the CBN to increase OMO rates just to retain some FPIs.
Elsewhere, argument for a reduction in the CRR
would result into more FX pressure following more naira liquidity. In the same
manner, a hike in the CRR would render CBN's interventions counterintuitive. On
balance, we think CBN would leave the CRR unchanged while it also stops the
debiting of banks with excess liquidity.
Given the symbolic nature of the MPR, we think the
CBN might opt for a reduction just to give a body language of supporting
growth. More importantly, we believe the CBN will opt for the use of more
administrative tools and increased interventions. For the former, we can't rule
out a restriction of access to FX akin to events in 2015.
Research 234 (1)
2701653 research@armsecurities.com.ng
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