CBN bows to pressure, adopts flexible exchange rate policy

As expected, issues on the rising inflation and the foreign exchange market dominated discussions at the 250th meeting of the Monetary Policy Committee, MPC, Meeting of the Central Bank of Nigeria as the committee finally adopts flexible exchange rate policy.
The federal government has been under pressure to either devalue the naira, or adopt a flexible exchange rate system due to drop in the nation’s reserve which presently stands at $26.6bn.
The forex market had reacted negatively to the government’s directive to oil marketers to source for their forex needs in the secondary markets for petroleum importation following the recent deregulation of the downstream sector.
Inflation figures have also been negative in recent times, as the National Bureau of Statistics, NBS, reported that Nigeria’s inflation rate rose to a six year high of 13.7percent in April, from the 12.8percent recorded in March. The NBS attributed the 0.9percent rise to “structural constraints” in the economy such as the increase in electricity tariff, kerosene prices, petrol pump prices and prices of vehicle spare parts.
Consequently, the MPC directed the management of the apex bank to adopt a flexible exchange rate policy in the inter-bank forex management structure. Under the new policy regime, exchange rates will be strictly determined by the forces of demand and supply.
Addressing journalists at the end of the meeting, the CBN Governor, Mr. Godwin Emefiele, said with the recent depreciation of the country’s foreign reserves, the bank had to introduce greater flexibility in the management of forex.
He said while the country awaits the new guideline on the management of foreign exchange, the CBN will retain small window for critical transactions as the apex bank does not have enough foreign exchange to meet all the demand by users.
The governor cited the critical transactions as the importation of vital machinery for production and basic raw materials critical for manufacturing which by their nature could not be sourced locally.
He also ruled out the possibility of the CBN providing foreign exchange to fund the operations of Bureau De Change operators under the new policy.
The committee had in its last two consecutive meetings signaled the imperative of the reforms that needed to be carried out in the foreign exchange market.
“The committee is aware that a 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.
“Consequently, such a structure must evolve to provide a basis for radically improved investment climate to attract new investments. The committee recognises the exchange rate as a very important macroeconomic variable, which must be earned by increased productive activity and exports.
“Accordingly, the MPC decided that the bank should embrace some level of flexibility in the foreign exchange market.”
On the negative GDP rate recorded in the first quarter of this year, Emefiele said the delay in the passage of the 2016 budget was a major factor that contributed to this.
“Unfortunately, the delayed passage of the 2016 budget constrained the much desired fiscal stimulus, thus edging the economy towards a contractionary output.
On the recent deregulation of the downstream sector of the oil industry, the committee, according to the CBN boss, believed that the move was in the right direction and would lead to increased supply.
He, however, cautioned that the pass-through effect of prices to other products had to be considered when taking such policy decision.
With imperative conditions for currency devaluation in an import dependent economy like Nigeria, the CBN has been accused of not devaluing the naira for political and not economic reasons. Challenges of little or no fiscal buffer, weak reserve, weak forex earnings, are said to have been enough reasons for the naira to have been devalued before now.

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