Some members of the Central Bank of Nigeria’s (CBN) monetary policy committee (MPC) have expressed concern that the inflexibility of the foreign exchange market and inherent dollar shortage are crimping growth in Africa’s largest economy.
The MPC members expressed their opinions in the Communiqué’ No.105 from the meeting held on January 25 and 26, 2016 released on Thursday by the CBN.
“Liquidity remains tight in the foreign exchange market, posing significant threat to growth in 2016,” Sarah Alade, CBN Deputy Governor, Economic Policy, and MPC member said.
“To mitigate the adverse effects, effort should be made to increase foreign exchange supply to the interbank market.”
Nigeria has run down its reserves from a peak of $42.8 billion in 2014 to $28.4 billion, the equivalent of 6.7 months of imports, in a failing bid to maintain a hard dollar peg and in the process, reduced its external buffers against future shocks.
The premium between the CBN and non-CBN window closed 2015 at 33 percent for parallel market and 31 percent for bureau-de-change, rising from 9 percent and 11 percent respectively at the end of 2014.
By January 2016 however, the arbitrage window had further worsened to 54 percent and 47 percent respectively. “In other words, costs are now reflective of the difficulty of access to FOREX at the CBN window, and thus have been determined by exchange rates at the non-CBN windows.
This raises the additional question of whether the price of policy uncertainty and inconsistency is already translating to rising prices,” Doyin Salami, an economist and MPC member said.
“Market policies in general, are becoming inconsistent with investment promotion policies. Such decisions are imposing administered constraints that are in effect choking the free flow of increasingly scarce private capital and material to existing varied capacities in the economy.”
Growth in Africa’s biggest economy and oil exporter, slowed to 2.8 percent last year, the weakest level since 1999 and down from 6.2 percent recorded in 2014, data from the Bureau of Statistics show.
The 60 percent slump in oil prices from its peak does not completely explain the collapse in growth, with a major reason being the inadequate government policy response, analysts say.
The CBN has choked off supply of dollars to manufacturing firms after it introduced some forms of capital controls last year, to conserve its reserves.
“The restrictions are hurting businesses and supply chains with merchants and suppliers being hit by the dollar shortage,” Shola Adekoya, acting Chief Executive Officer (CEO) of e-commerce firm Konga.com,” said at a conference in Lagos, this week.
Manufacturing in Nigeria is already in recession, with industrial output contracting 2.2 percent last year, compared with expansion of 6.8 percent in 2014.
Salami said his proposal for the Committee’s consideration that the mid-point of the exchange rate band be moved from N197/US$ to N220/US$; and the exchange rate band be widened to +5/-5 percent around the mid-point ofN220/$ was rejected, although not by all MPC members.
Nnanna Joseph, another MPC member observed in his minutes that the increasing demand pressure on the Forex market, amid declining reserves due to softening oil prices and capital outflow, demands flexibility in exchange rate management.
“While, demand management strategies still remain valid in the circumstance, the current incessant pressure on the forex market requires additional proactive market measures to rein in speculative attacks on the naira,” Nnanna said.