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Matters arising before next MPC meeting

On July 7, 2009, two major events that were related took place in the Nigerian financial industry. One was the first meeting of the Monetary…

On July 7, 2009, two major events that were related took place in the Nigerian financial industry. One was the first meeting of the Monetary Policy Committee (MPC) to be held under the leadership of the new central bank governor, Sanusi Lamido Sanusi. The other was the maiden media briefing by the governor, following his confirmation by the Senate about a month earlier.

“In his briefing to the media, Sanusi enumerated measures that the CBN had taken to encourage the performance of the economy. These measures included the reduction in April that year of the Monetary Policy Rate by 17.5 basis points to encourage the flow of capital to productive activities; the reduction of liquidity and cash reserve ratios from 30 per cent and two per cent to 25 per cent and one per cent, respectively.

“When these measures failed to produce the desired results, he said, the central bank resorted to direct control measures that involved interest rate caps and the reintroduction of exchange controls. The failure of the economy to respond favourably to these “monetary easing measures” reflected mainly the under-developed nature of the Nigerian financial system and, concomitantly, “the weakness of the transmission mechanism of monetary policy.”

“The MPC is the highest policy-making committee of the Bank, with the mandate to review economic and financial conditions in the economy; determine the appropriate stance of policy in the short to medium term; review regularly, the CBN monetary policy framework and adopt changes when necessary; also communicate monetary/financial policy decisions effectively to the public, and ensure the credibility of the model of the transmission mechanism of monetary policy.

“The MPC meeting is an important event in the financial industry. Markets wait for it with eagerness. Days before the meeting holds, financial analysts and economists take positions on their expectations of the likely outcome of the meeting. Based on their reading and analysis of the state of the economy as revealed by key economic indicators such as interest rate, inflation rate, money supply and the fiscal conditions, they posit three possible interest-rate decisions by the MPC: raise, lower, or leave the interest rate unchanged. In the case of a raise or lowering of the rate, analysts could state by what margin they expect the rate to be changed.”

The above excerpts are from my forthcoming book: When Stocks got Stuck:  The Crash and Rise of Nigeria’s Capital Market. While they relate to events that took place in a different dispensation, they bear some semblance with the present situation in our financial markets, especially the foreign currency segment. The narrative above shows that at a point when interest-based measures failed to tame the market instability, the regulator resorted to controls, including exchange rate controls.

The MPC has scheduled a two-day meeting for next week, which will take place against the background of heightened uncertainties in the nation’s forex market. There are tensions bothering on policy instrument choices that must be addressed at the MPC meeting. What will the CBN do to stop the haemorrhaging in the economy as a result of the free-fall of the naira? Are Nigerians to expect additional quantitative controls?

Obviously, these are not the best of times for the CBN and its officials, nor for the naira. The naira has been on a race to new lows over the past three weeks thereby threatening the bank’s core mandate to maintain a stable value of the currency.

The current bashing of the naira started after the central bank abrogated the sale of dollars to bureau de change operators on July 27, 2021 at its MPC meeting. That day the value of the naira on the parallel market was N504/$, while it exchanged for N411.5/$1 at the I&E window. Fast-forward to September 14, 2021. The exchange rate of the naira has gone to N545/$ (some said N549/$). Let’s take N545/$, which translates into a depreciation of 7.53 per cent, in just 56 days!

A rate of 7.5 per cent is what investors may be targeting in some markets for a whole year. Now, an asset class that has performed so badly in less than a quarter of the year may not be considered for inclusion or retention in an investment portfolio.  Therefore, the current pressure on the naira will soon lead to investors dumping naira-based assets as they take a flight to safety. They will want to hedge against further losses. Already, there have been talks about some pension fund managers wanting to invest in foreign currency-denominated assets.

This will mean further pressure on the naira as investors and their fund managers dump the local currency in preference for the dollar or dollar-based investments.

This is double jeopardy for Nigerians. It means in part that the naira is losing its role as a store of value. A naira that someone received on July 27 this year and has not been spent has already lost 7.5 per cent of its value in relation to the dollar. Given the import-dependent nature of our economy, not many consumers will escape this decline.

Now, add to that the impact of inflation, currently put at 18.17 per cent. All these have left the average Nigerian consumer worse off than he was at the start of the year. To maintain the same level of consumption they had at the beginning of the year, they have to spend a lot more now, which, to many, is almost impossible.

The central bank has applied virtually all of its monetary-policy instruments, even those the MPC set at its July meeting. The bank has embarked on moral suasion, appealing to the banks to toe the line of decency and ethics in their dealings with foreign currency buyers. It has also threatened to name and shame bankers found to be involved in some shady dealings. Yet, the naira seems to have defied all of CBN’s policy actions. The parallel market remains defiant.

Therefore, all eyes are on the MPC. What will it do? What policy variables are still left in its toolkit to douse the current instability and restore confidence in the financial system?