Federal Government of Nigeria

• In the last five years, Naira has been officially depreciated more than 92% from N197 to a United States dollar in 2015 to N379 as of April but then scrapped and replaced by NAFEX rate priced at N410.25.
• CBN will continue to drive the Naira-for-Dollar scheme to foster the inflow of dollar from abroad

Nigeria’s central bank decision to unified foreign exchange (FX) rates is expected to unlock a $1.5 billion loan from the International Monetary Fund (IMF) which required the convergence of the monetary policy authority’s multi-tiered exchange rates as a pre-condition for disbursement.

Move to unified rates comes after the Federal Government of Nigeria officially asked the Lawmakers to approve $6.18 billion foreign loans to shore up weak revenue amidst a heavy capital spending plan, and budget 2021 deficit financing.

As the Central Bank heeds the call for unification of its multi-tiered exchange rates, analysts said the convergence will partially resolve Nigeria’s foreign currency (FCY) liquidity challenges.

MarketForces Africa reported the monetary authority has replaced the official rate for which government conducts transactions with Nigerian Autonomous Foreign Exchange (NAFEX) rate. The CBN also adjusted the rate quoted on its website to reflect its non-lousy devaluation.

In the last five years, Naira has been officially depreciated more than 92% from N197 to a United States dollar in 2015 to N379 as of April but then scrapped and replaced by NAFEX rate priced at N410.25.

The Nigerian external reserves continue free-falling due to scarcity of foreign currency inflow, dropping to $34.3 billion, which barely covers 5 months of import for a nation that relies solely on foreign inputs for further production.

In the first quarter of 2021, Nigeria’s economic size grew marginally at 0.51% as against 0.11% reported in the fourth quarter of 2020. Analysts believe growth remains tepid on account of the widened output gap.

Both inflation and unemployment rate have been high, resulting in stagflation but the CBN remains unfazed by this weak macro condition as policy rates were held steady for the next two months

Nigeria’s FX Rates Convergence Will Partially Solve FCY Challenges Godwin Emefiele, CBN Governor
The MPC Decisions

The Monetary Policy Committee (MPC) maintained status quo on all policy rates at the end of the 2-day MPC meeting, which ended yesterday, 25th May 2021.

Meanwhile, the decision to hold rates steady was unanimous, based on the fact that the committee members considered achieving high economic growth to be a major priority at an early post-recession phase, regardless of the above-trend inflation rate.

Thus, the Monetary Policy Rate was maintained at 11.5%. The asymmetric corridor around the MPR was retained at +100bps/-700bps. The Committee also voted to retain the Cash Reserve Requirement (CRR) at 27.5%, and liquidity ratio at 30.0%.

Key considerations of the MPC

Chapel Hill Denham noted that the key considerations of the MPC include surge in Covid-19 cases in Brazil and India and the emergence of vaccine-resistant variant of the virus in some African countries like Tanzania and South Africa.

“This poses a threat to the reality of IMF’s growth projection of 2.5% for 2021. On one hand, India, being a major buyer of Nigeria’s crude oil has cut back on demand, and Nigeria is at risk of new cases if international travel is not properly managed”, analysts said.

Policymakers believe that economic growth will foreshadow a slowdown in inflation rate as the apex bank reiterated that rising inflation trend was due to pandemic-driven supply chain disruption.

The committee discussed that the fundamentals for growth in 2021, which they consider strong and a low MPR will foster the pace of growth, which will increase domestic production and decelerate the inflation rate.

However, there was concerns about stagflation, representing a mutual co-existence of high inflation rate and low production in Nigeria amidst high record of joblessness.

In addition, the monetary policy committee factored in the fragile economic recovery, lagging population growth, saying the Q1-2021 growth of 0.51% remains fragile and insufficient to match the 2.6% population growth in 2020/21.

It also put into consideration the impressive performance of CBN intervention programmes, which require low-interest rates for subsistence.

The Anchor Borrowers’ Programme, National Youth Investment Fund, Mass Metering Programme, and others have helped to engender economic recovery in Q1-2021, and enabling them through an abased interest rate environment is critical at a time like this.

Meanwhile, there was apparent worry about persisting security challenges, which have fallout on food production as they noted that abating the impact on food security will require a ‘generous’ interest rate environment to maintain agricultural financing.

Chapel Hill Denham said the CBN is enthralled by the fragile economic recovery and the presence of shocks hence, the decision to hold rates steady to realise more growth before tilting monetary policy focus back to inflation.

It recalled three committee members had, in the last MPC meeting, voted for a rate hike on the back of escalating inflation rate and the need to nip the growth in the bud to avoid spiraling the existing case of stagflation.

Analysts said with inflation rising from 16.47% in Jan-2021 to 18.17% in Mar-2021, the justification to take a hawkish monetary policy stance was ominous.

“Our view prior to the MPC meeting was that the committee members will place a higher weight on inflation as a basis to vote a rate hike. Besides, the decline in headline inflation rate by 5bps to 18.12% in Apr-2021 was not considered significant to sway the conviction of a rate hike.

“However, the language of the MPC on Tuesday is that growth is a top priority in a post-recession phase and since the current MPR had supported recovery, it is in the best interest of the economy to maintain this position”, Chapel Hill Denham stated.

The firm said the CBN will continue to monitor inflation development in the coming months with the expectation that the retention of the MPR will drive domestic production activities, which will result in a drop in the inflation rate.

Besides, given the decline in the Apr-2021 inflation rate, Chapel Hill Denham’s analysts said there is a possibility of another marginal drop in inflation in May and June 2021, given the base effect. Subsequently, inflation can pick up and the CBN would be ready for another MPC meeting by then.

The investment firm said with the CBN updating the NAFEX rate of N410.25 on its website, the much anticipated convergence between the official and NAFEX rate has been achieved. The Minister of Finance, Zainab Ahmed, said the government had also adopted the NAFEX rate for government transactions.

While the CBN is yet to make an official statement, the Governor stated that the managed-float system will not be replaced with a freely-floating exchange rate, but the market will be monitored to adopt the right FX strategies for the economy.

Furthermore, the convergence between the official and the NAFEX rate is expected to partially resolve some of the liquidity challenges experienced by the CBN and also reduce pressure on the external reserves.

However, analysts added that the CBN will remain enmeshed in a complex policy ‘triangle’ of trying to achieve a single-digit inflation rate, high rate of economic growth sufficient for post-recession and exchange rate stability.

“Against these odds, what we think the CBN will do ahead of the next MPC meeting is to continue to intervene in the foreign exchange market to keep rates stable while leveraging on external support (remittances and foreign portfolio investment) to achieve reserve accretion.

“The CBN will continue to drive the Naira-for-Dollar scheme to foster the inflow of dollar from abroad.

“While doing this, the CBN will strategically allocate capital across different sectors under its different real sector interventions. With an attempted grasp on GDP and exchange rate, inflation rate is expected to maintain the April-2021 downside inflection”, Chapel Hill Denham said.

“While the CBN might have kept policy rate constant at the MPC meeting, we note that financing conditions remained considerably tight, owing to weaker level of liquidity in the money market, as well as a more hawkish balance sheet policy by the CBN”, it added.

Analysts explained that the CBN has used its balance sheet to tighten bank and non-bank liquidity, specifically using the issuance of Special bills, Cash Reserve Requirements (CRR debit), and OMO auctions to mop up liquidity in the financial system and raise market interest rates.

As a result, the one-year open market operations and Nigerian Treasury bill auction stop rates have risen to 10.10% and 9.75% from 6.75% and 0.15% in November 2020, respectively.

“We do not expect to see a reversal in this trend and retain our expectation of a 50-100bps rate hike in 2021. In our view, the consolidation of additional growth in the coming quarters will provide enough incentive for a more hawkish policy era, already signaled by some Central Banks globally.

“We see a very strong possibility of a 50-100bps rate hike at the July/September MPC meeting if the economy maintains a strong and positive GDP growth momentum in Q2-2021”, analysts at Chapel Hill Denham said.