Nigeria adopts new forex policy as economy faces “imminent recession”

To begin to reverse what its governor, Godwin Emefiele, called “imminent recession” in the Nigerian economy, the Central Bank of Nigeria on Tuesday announced a new policy that would guarantee more flexibility in the management of the foreign exchange market.

The CBN governor, who made the announcement at the end of the Monetary Policy Committee meeting in Abuja, said details of the new policy would be released in the coming days.

He said the new policy would guarantee improved access to foreign exchange for business to boost the economy.

Analysts believe the government is planning to officially devalue the naira from its current 197 rate to the dollar, in a desperate move to strengthen the ailing economy.

Recent data from the National Bureau of Statistics indicated that the economy contracted to about 0.36 per cent in the first quarter of the year, the first time in over a decade.

Experts say the economy might shrink again in the second quarter which ends in June, a development that will effectively usher in recession in the economy.

A country is said to be in recession when its economy shrinks in two consecutive quarters.

The CBN governor said the new policy would not involve the return of the bureau de change operators, as they would continue to source their foreign exchange from the autonomous market.

“It is time to introduce greater flexibility in the management of FOREX market,” the CBN governor said.

“After assessing the various risk profiles available, the committee resolved to adopt the least risky option by adopting a flexible foreign exchange policy to restore the automatic adjustment properties of the exchange rate.

During the meeting, monetary policy rate, MPR was retained at 12 per cent; Cash Reserve Ratio, CRR at 22.5 per cent and liquidity ratio at 30 per cent.

Mr. Emefiele lamented the poor performance of the economy in the first quarter of 2016 as a result of rising inflationary pressures from severe shocks related to energy shortages, price hikes, scarcity of foreign exchange and depressed consumer demand, among others.

The National Bureau of Statistics said domestic output during the period contracted to 0.36 per cent, the first negative growth in many years, representing a drop of 2.47 percentage points in output from the 2.11 per cent recorded in the last quarter of 2015.

He said despite the efforts by the CBN to keep the economy afloat, they seem “insufficient to fully avert the impending economic contraction”, as the conditions that led to the contraction in the economy in the first quarter of 2016 remained largely unresolved.

Noting that many of the conditions fuelling inflation in the economy were outside the direct control of monetary policy, the CBN governor blamed the long delay in the passage of the 2016 budget, which created several distortions in the system, particularly on investment.

“A lot of activities in the economy are dependent on the budget. 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,” he said.

Mr. Emefiele recalled that the MPC had hinted in July 2015 about the possibility of the economy falling into recession if appropriate complementary measures were not taken by the monetary and fiscal authorities, saying the budget impasse had constrained the fiscal stimulus to the economy.

Consequently, he said the Committee had mandated the CBN to implement reforms that would promote greater flexibility of rate and transparency in the operation of the inter-bank foreign exchange market.

As part of resolutions at the end of the meeting, the CBN governor said the committee reaffirmed its commitment to maintain price stability by voting unanimously to adopt greater flexibility in exchange rate policy management to restore the automatic adjustment properties of the exchange rate.

Other resolutions included to retain monetary policy rate at 12 per cent; cash reserve ratio at 22.50 per cent and liquidity ratio at 30 per cent, while asymmetric window was maintained at +200 and -500 basis points around the MPR.

He said the CBN would however retain a small window for funding critical transactions in the areas of support to importation of plants and equipment required to stimulate production of goods whose raw materials are available locally.

The flexibility policy, he explained, did not mean the restoration of the bureau de change operators and the supply of dollars by CBN to them to fund their businesses, saying they would continue to source hard currency from the autonomous market.

On the impact of the scarcity dollar on fuel supply, the CBN governor said the fuel pricing template was still capable of guaranteeing reasonable profit to the petroleum marketers even if they sourced foreign exchange at over N320 to the dollar to import fuel and sell at the capped price of N145 per litre.