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The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), which commences its 245th meeting this Thursday is expected to take critical decisions that would determine the fate of the naira, which has been under intense pressure at the parallel market in the past few weeks.
The two-day meeting holds in Abuja. The MPC, which has operational independence in determining monetary policy will be meeting for the fourth time this year. The naira, which sells for N196.95 to a dollar on the interbank market, goes for about N240 to a dollar at parallel market points across major cities in the country.
The pressure faced by the naira at the parallel market was provoked by the CBN’s restriction of importers of 41 products from accessing forex at the official foreign exchange market. Some of these items include rice, wheel barrows, head pans, cement, margarine, palm kernel/vegetable oil, meat and processed meat products, vegetable and processed vegetable products, poultry, private airplanes/jet, Indian Incense, toothpicks, tinned fish in sauce (Geisha/Sardines), among others.
The depreciation of the naira had heightened the debate on the devaluation of the naira. While the central bank has maintained that its decision not to undertake a further devaluation of the naira was as a result of the need to safeguard the Nigerian economy from the shocks and negative impact this would have on the economy, some analysts and agencies have intensified their call for the devaluation of the nation’s currency.
Nigeria’s consumer price index, the basket used in gauging inflation rate, increased to 9.2 per cent at the end of June.
However, analysts at Financial Derivatives Company Limited (FDC) anticipated that the CBN will increase use of administrative measures in its quest to protect the nation’s currency. These administrative tools are the cash reserve ratio (CRR) and Open Market Operations (OMO).
According to them, the CBN has already reached the upper limit of its tightening cycle, predicting that a probable outcome at the MPC meeting would be for the CBN to maintain the status quo and use more administrative measures in preserving the forex reserves.
“Even though the CBN is committed to defending the naira, the currency pressures facing Nigeria are becoming more intense. The spread between the interbank rate and the parallel market creates an arbitrage corridor for speculators, and is now a round tripper’s paradise. Another issue that is of concern is the consistent decline in oil receipts as a result of falling oil prices, when the sanctions on Iran are finally removed,” it stated.
Similarly, analysts at the WSTC financial Services stated:”We believe the CBN’s tight monetary stance aimed at ensuring stability in the forex market and curbing inflation will continue to support attractive yields in the fixed income market. Also, we expect the surging inflationary pressure and uptrend in inflation, and the ensuing effect of shrinking real returns to drive investors’ demand for higher returns on fixed income investments in the second half of the year.”
A financial market analyst who pleaded to remain anonymous, however, advised the MPC members to retain the interest rate and other monetary tools, but devalue the naira.