Revisiting CBN’s Monetary Policy Approach

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Wednesday, July 20, 2016 6:00pm / Jayaike Ukoha-Kalu*

The Central Bank of Nigeria (CBN) needs to clearly define its role in the foreign exchange (FX) market and move on. With Nigeria's economy under serious strain due to oil price and production shocks, persistent foreign currency shortages, and slowing growth, the Monetary Policy Committee (MPC) resolved in May 2016 to quit defending the Naira and finally take the peg off its exchange value against the greenback. This came after sixteen (16) painful reserves depleting months of fighting to keep the dignity of the Naira.  

In a previous effort to curb demand for FX, the CBN banned forty one (41) items from being imported. This act had no real effect on the existential nature of Nigeria’s need for USDs to function. With the same aim in mind, the Federal Government partially deregulated the downstream petroleum sector by removing the subsidy it grants to petroleum product marketers, while setting a price ceiling on premium motor spirit via a price modulation system - a move that aimed at easing the weight of providing FX facilities to marketers. The summary of Nigeria’s 2016 Fiscal and Monetary policy direction have thus revolved round the FX conundrum. 

The MPC’s May resolution was greeted with a sigh of relief by Nigerians who understood what it meant and very cautious optimism by international investors and market players.  

In reality, not many people had been getting FX at the pegged exchange rate, as the two hundred and forty (240) year old invisible hand of Adam Smith remains at work over-time to make sure by all means that the market returned to, or reached equilibrium; ensuring that the real incapability of the CBN to provide FX was evident in the parallel market; the monster baby of the CBN.  It’s been a month and a few days since the actual implementation of the flexible exchange regime introduced; and the general fear of the situation is that the policy resolution might have been expired or worse, dead on arrival. The novelty of the situation that existed a month ago has fizzled out and has consequently been replaced with confusion, unanswered questions and impatience from investors (local and international).

The Central Banking System of any country should be the apex dictating, regulatory & stabilizing force of the economy. The CBN seems to be doing all but stabilizing the economy. Concerning the FX market, it is in fact calling a spade, a desert fork and expecting everyone to go along with it. The first concern with the new FX policy lies in the rules of engagement, where the CBN purposely set requirement levels it knows only a few banks and other participators comfortably meet. The effect of this rhetoric meant that before it opened, the market had already been restricted to only primary dealers who are capable of buying in tranches of five hundred thousand (500,000) dollars or upwards. A market that actively establishes high barriers to entry does not economically sound like a free one.)

Furthermore, there have been interventions by the CBN as the regime is designed, which makes it evident that the market is still suffering serious liquidity issues and the CBN is desperately trying to manage its “free” float.

CBN’s management of the naira arises from its concern about supposed inflation that the high cost of FX will create, which is understandable but unfounded since many still get FX above the interbank market rates. In addition, inflation in Nigeria is an exogenous variable that can scarcely be controlled by the CBN, its levels are a direct function of the local interactions and global performances of one commodity; Oil. Since, the country is dependent on the FX that oil revenue provides; inflation exposure is something the economy will always have to deal with. At this point in Nigeria’s economic history, trying to micro manage the foreign exchange situation is the tactical equivalent of pouring water in a basket or better still pushing a boulder up a hill, as the CBN simply does not have the capacity to maintain the position it is trying to assume in the market.  

In a free market, it is imperative to let the forces of demand and supply interact uninterruptedly - let the market find its balance. Macroeconomic problems and complexities have always been the major challenges facing the Nigerian economy, but this time the CBN seems not to understand its role in the impending situation or even the graveness of the situation. In many of its MPC communiqués over the past year, the CBN has recognized severally the macroeconomic shocks that have battered the Nigerian economic space but gone ahead to underestimate the extent of the economic slowdown in Nigeria. The tightening of FX controls and lax monetary policy over the past sixteen to eighteen months have had adverse effects of the economy.  

There are other policy tools available to the apex bank that it can use to stabilize and stimulate the economy. One that especially comes to mind is the interest rate. A more conservative cost of borrowing might see the economy stimulated into more activity. The point being made is not an argument for more expansionary or conservative monetary policies, but one to show that there is Central Banking beyond the exchange rate.  The metrics availed to us courtesy the Nigerian Bureau of Statistics show that the current inflation rate is at 16.5%, moving up 0.9% from May’s 15.6%.  The CBN may have misused its opportunity to contain the damage done by macroeconomic shocks, during the sixteen months where it refused to loosen up FX controls.  In essence, the CBN needs to get rid of the internal price ceiling it has set for the Naira as soon as possible and look towards other methods of Central Banking; if at all it hopes to attract any foreign investment that will help Nigeria in this period. If there’s one thing that we know about investors, it is that they hate uncertainty, and that’s where the market space is right now. It is uncertain.  

Current GDP in Nigeria is in the negative at minus zero point three six (-0.36), going by the way Q2 2016 has turned out, results may be just as bad or even worse by the time we see the numbers. According to recent IMF forecasts, Nigeria’s GDP by the end of the year will be down by one point eight (-1.8), this meaning that the country would be in a recession. For Fiscal or Monetary policy to be effective, either of the two has to be timely and proactive, not reactionary. Fiscal and Monetary policy also have to be free from political sentiments, that’s not the signal being received from the CBN, it seems the Nigerian Federal Government might be having undue influence over the CBN, and in other words, the thirteenth member of the MPC may be the President. This situation is hampering the effectiveness of the bank and its God given right to independence. In conclusion, all hope is not truly lost; as the MPC meets on the 25th & 26th of this month, the expectation is that the outcomes will be more tailored to the real material situation of the country.  

*Jayaike Ukoha-Kalu is an economics student of Babcock University 


1.       Resolving the Exchange Rate Regime Conundrum

2.      CPI, GDP data from The Nigerian Bureau of Statistics

3.      IMF world economic outlook, July 19th 2016 [Accessed on 19/07/2016]

4.      CBN MPC Communique No 107 of the Meeting held on May 23 and 24, 2016. Abuja, Central Bank of Nigeria

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