From Ejike Okpa, Dallas, Texas, USA
The Monetary Policy Committee of the Central Bank of Nigeria on Tuesday bowed to pressure by devaluing the naira from N155 to N168 to the US dollar.
The MPC tightened the apex bank’s monetary policy by allowing some flexibilities in the exchange rate to stem speculative activities and depletion of reserves.
The announcement was made by the CBN Governor, Mr. Godwin Emefiele, while briefing journalists shortly after the MPC meeting at the bank’s headquarters in Abuja.
The bank also increased the Monetary Policy Rate from 12 per cent to 13 per cent.
The MPR is the anchor rate at which the CBN, in performing its role as lender of last resort, lends to Deposit Money Banks to boost liquidity in the banking system.
By this increase of 100 basis points in MPR, the cost of funds to the banking system from the apex bank has now increased thus, leading to an increase in lending rate from commercial banks to businesses.
Emefiele also said given the level of excess liquidity in the banking system, it becomes imperative for the CBN to address the sources of foreign exchange demand pressure.
To achieve this, it devalued the naira by moving the midpoint of the official window of the foreign exchange market from N155 to N168 to a dollar.
He added that the committee also approved a widening of the band around the midpoint by 200 basis points from +/-3 per cent to +/-5 per cent.
Another decision reached at the end of the two-day meeting, according to him, is an increase in the Cash Reserves Requirement on private sector deposits by 500 basis points from 15 per cent to 20 per cent with immediate effect.
The bank also retained the public sector CRR at its current level of 75 per cent; maintained the symmetric corridor of +/- 200 basis points around the MPR, retained both the public sector CRR at 75 per cent and the foreign exchange trading position at one per cent.
“The committee was of the opinion that the economy stood to gain by further tightening of monetary policy stance to anchor inflation expectations; and some flexibility in the exchange rate to stem speculative activities and depletion of reserves.
“Consequently, the Committee decided as follows; increase the MPR by 100 basis points from 12 to 13 per cent, increase the CRR on private sector deposits by 500 basis points from 15 per cent to 20 per cent with immediate effect; move the midpoint of the official window of the foreign exchange market from N155/US$ to N168/US$,” he said.
In devaluing the country’s currency, Emefiele said the committee considered the fact that the falling oil price had reduced the accretion to external reserves, thus constraining the ability of the bank to continually defend the naira and sustain the stability of the exchange rate.
He said while the supply side had been further weakened by the commencement of normalisation of monetary policy by the United States Federal Reserve following the termination of the third quantitative easing on October 29, 2014; the pressure from the demand side of the foreign exchange was aided mostly by the excess liquidity conditions in the banking system and speculative activities.
For instance, he said it had become increasingly worrisome that improvement in liquidity conditions in the banking system, which was designed to enhance the resilience and stability of the banking system, had not translated into increased credit expansion to the real sector to engender inclusive growth and boost employment.
Rather, he lamented that this liquidity had led to an upward pressure in the foreign exchange market and Standing Deposit Facility window of the Bank thus making deposit money banks to continue to exercise caution in their approach to lending.
The CBN governor said a banking system with an overly high profit motive negates the core tenets of banking and purpose of a banking licence, noting that under the current circumstance, monetary policy must be bold and emphatic.
He said, “The current situation demands that the Bank confronts the issue of declining external reserves head-on in order to strengthen the value of the domestic currency.
“Consequently, stabilising prices and maintaining exchange rate stability and charting a sustainable path for medium to long-term growth are the immediate top priorities.
“In the committee’s opinion, a more flexible naira in the face of non- existent fiscal buffers was the most viable policy option at a time of heightened demand pressure for foreign exchange and falling oil prices.
“The committee was, therefore, of the view that if it failed in taking the right policy actions now, the market would force the Bank to take more drastic actions in the future with far less foreign exchange reserves.
“Also, given the level of excess liquidity in the banking system, it becomes imperative for the Bank to address the sources of the foreign exchange demand pressure.”
The CBN governor called for a diversification of the economy, adding that Nigeria had no business importing rice, fruit juice and milk.
He lamented that the importation of these three products was putting intense pressure on the naira.
He said, “We have seen reserves pressures coming from $39bn to $36bn. It’s unfortunate that the pressures have come. But I think what could have been done, we could have taken measures to diversify our economy.
“There is a need for us to diversify. Why should we be importing rice? Why should we be importing fruit juice into the country? Why should we be importing milk?
“In fact, before I was born, milk was being imported. What rocket science do we need to produce milk. It is just for people to get committed and embrace agriculture.
“I must confess that at this stage, we don’t have a choice, we must have to embrace import substitution before we talk of export-oriented industrialisation.”
Fuel subsidy removal
The governor said the committee was of the view that the softening crude oil prices could provide necessary leverage for the fiscal authorities to reduce budgetary outlays on fuel subsidy and channel such savings to growth enhancing sectors of the economy.
He said, “The committee also noted that unlike in previous episodes, the current downturn in oil prices is not transitory but appears to be permanent; being a product of technological advancement.”
For instance, he said currently, the US which used to be Nigeria’s former major oil export destination now meets an average 80 per cent of its domestic oil demand from local shale oil retorting technology production.
The US, he revealed, also exports over eight million barrels of crude oil daily.
He said, “The committee took note of the supportive fiscal stance in this regard and public commitment to take advantage of the low oil price to reduce fuel subsidy spending and liberalise prices as in many emerging economies.
“Furthermore, the Committee expressed satisfaction with the recent demand management measures announced by the fiscal authorities to contain pressure in both the goods and money markets and provide some respite in the near term.”
$73 oil price benchmark too optimistic
In the light of declining oil prices, the CBN boss said the committee was of the view that the oil price benchmark of $73/barrel proposed in the 2015 Federal Government budget might be overly optimistic.
Emefiele said in view of the fact that prices of oil might further decline, there was the need for considerable caution on the budget’s revenue projections.
He argued that a weak public finance may impinge adversely on growth prospects as it might lead to reduction in critical public and private consumption and investment spending.
The CBN boss said, “People are not that optimistic that this drop will continue particularly given what is happening in the Middle East – the fact that for instance if Iran reaches its deal with the US and other stakeholders that it is negotiating with that the supply of crude into the market will further increase and this will further create further reduction in crude prices and will also have adverse consequences on the economy.
“That reason, we just feel that we need to put it on notice that the $73 per barrel that has been anchored for the benchmark for the budget looks good but not that pessimistic enough.
“I think it is good for you to be pessimistic because when you are pessimistic, you protect your downside rather than being optimistic and leave your downside open and when the risk eventually occurs, you find out that you have a problem.”
He noted that the CBN would work with the Federal Government to ensure that the austerity measures which were unfolded recently would not have negative effects on the people.
Emefiele said, “A couple of measures have no doubt been taken by the fiscal authority talking about the austerity measures, trying to look at other means by which we can raise our non oil revenues, imposing certain taxes on luxury items.
“ Nothing is too much in terms of contributing to keep the economy running well but I think that there are other measures that could be though about that would help the situation.
“We will work together to see how this tightening and the austerity measures do not get too hard on our people.”
Insecurity, a threat to growth outlook
On the growth outlook, the CBN governor said the committee noted the robust expansion in domestic output in the third quarter of 2014 against the tepid growth in the global economy, but cautioned that the continuing insurgency in the North-East in combination with other risks could adversely affect the growth outlook.
He stated that the growth had been anchored by the improved performance in services, agriculture, trade, and industry, and called for a passage of the Petroleum Industry Bill to unlock the potential of that sector of the economy.
Given the not too impressive fiscal revenue outlook, the committee, according to him, challenged the sub-national governments to seize opportunity in drop in revenue to reduce reliance on allocations from the Federation Account in funding their operations.
To this end, the committee commended the efforts of some states which recorded unprecedented growth in their Internally Generated Revenues in 2013.
Consequently, it enjoined other states to emulate those states by strengthening their IGR mechanisms with a view to minimising their reliance on FAAC allocations with attendant disruptions to their budget implementation arising from dwindling oil revenues.
However, he said the 2015 fiscal period would witness further tightening in money supply unless there is an improvement in the global economy.
Emefiele added, “For 2015, we would continue to monitor the situation. What I foresee is that the tightening measures will continue unless we see an improvement in the global economy particularly in the area of oil price where we are getting some vulnerability.
“But we will continue to monitor it but what I’m saying is that in 2015, we would continue in the path in terms of tightening.”