The Nigerian equities market appreciated to about five-month high
wednesday as positive sentiments continued to trail the Central Bank of
Nigeria’s (CBN) plan to introduce a flexible foreign exchange policy.
But feeling that the economy was regressing, the Senate yesterday
summoned the Minister of Finance, Mrs. Kemi Adeosun, and the CBN
Governor, Mr. Godwin Emefiele, to brief it on the monetary and fiscal
policies the executive arm had adopted to salvage the economy.
In the equity market, however, the Nigerian Stock Exchange (NSE)
All-Share Index surged 3.8 per cent to close at 28,260.61, while market
capitalisation added N353.4 billion to be at N9.7 trillion. The market
had gained 0.80 per cent on Tuesday when the decision was taken.
However, the naira dipped on the parallel market in reaction to the
central bank’s pronouncement as it fell to N350 to a dollar yesterday,
weaker than the N346 to a dollar it closed the previous day.
The Monetary Policy Committee (MPC) of the CBN announced on Tuesday
that it voted unanimously to adopt a flexible exchange rate policy,
while retaining a small window (from the CBN) for critical transactions.
This, it said, would be made public in the coming days.
To analysts at Lagos-based CSL Stockbrokers Limited, the move by
members of the MPC appeared to be a formalisation of the parallel
market, adding that it was in line with what they had been expecting for
the currency.
Its report said: “The flexible interbank exchange rate is
likely to be far lower than the rate at which the CBN has been selling
dollars to banks. We think this rate is initially likely to be around
the current parallel market rate of N340/US$1 as pent-up demand for hard
currency is released onto the market.
“Over time, the move is likely to increase the supply of US$
liquidity to the interbank market as remitters and exporters are likely
to be more willing to sell dollars at the lower interbank rate.
Similarly, we believe that investors who have been sitting on the
sidelines for fear of not being able to get hard currency out of the
economy will now be more willing to commit. With this increased supply,
we expect that the flexible interbank market rate will gradually
appreciate towards N310-N320/US$1.
“Overall this greater flexibility will be positive for the
economy as it will improve access to foreign exchange (albeit at a
higher rate) for firms which have been struggling to buy hard currency.
The inflationary impact, we believe, will be fairly limited because many
importers who were accessing dollars were already doing so on the
inefficient parallel market.”
On their part, analysts at Ecobank Nigeria Limited pointed out that
while it might be difficult to fully dimension the full impact of the
expected adjustment in the operation of the interbank foreign exchange
market, they opined that the flexible interbank exchange rate was likely
to be above the current rate of $1/N197, at which the CBN had been
selling dollars to banks.
They predicted that the expected currency adjustment would be
around the current parallel market rate of N340/US$1 as pent-up demand
for dollar was released onto the market.
“The effectiveness of this policy is likely to depend on the
size of the allocation to ‘critical sectors’ (as well as the sectors
that fall into this category) and the amount that is left available for
the newly-autonomous interbank market. The system could be open to
abuse. However, this opportunity to roundtrip is not new and has been
available under the system that was in place until today’s
announcement,” Ecobank analysts said.
But the Managing Director/Head of Research for Africa at Standard
Chartered Bank, Razia Khan, in a note to ThisDay, pointed out that
markets dislike uncertainty, and urged the central bank not to delay the
announcement of the policy change.
According to him, “The talk of maintaining a small window for
transactions for critical sectors is a concern. Any two-tier forex rate
would still introduce a distortion in the system, and even with the best
will in the world, still encourage round-tripping. If support were to
be given to critical sectors, it would be far better to find a
less-distortionary means of doing so.”
Analysts at Renaissance Capital in a note yesterday, stated that
the ideal scenario would be for the central bank to let the market set
the new interbank forex rate without restriction, and in so doing, allow
for an appropriate level to be found.
They said: “We think this is somewhere between the fair values
suggested by our two real effective exchange rate models – N255/$1 and
the longer dated one, at N315/$1. At this new price for the naira,
demand and supply would be brought into equilibrium through a decrease
in forex demand (rationing effect) and increase in forex supply (the
incentive effect).
“This would imply short-term pain, not least because of the
inflationary effect, and high interest rates. But we believe decent
growth would return, particularly given the low base effect.
“We believe the central bank may set a ceiling for the
interbank forex rate, or specify a band within which the naira may
trade. If the ceiling or band proves to be too low, say N240/$1, only
limited forex liquidity will come into this market, and the interbank
forex rate would soon hit the ceiling, or weak end of the band.”
At the Senate, however, senators expressed grave concern over the
state of the economy, summoning the Minister of Finance, Adeosun, and
the CBN governor, Emefiele, to brief them on the monetary/fiscal
policies that the executive arm had adopted to salvage the worsening
economic situation.
The resolution followed a motion by Senator Bassey Akpan (Akwa Ibom
North-east), who reviewed the economic score card recently released by
the National Bureau of Statistics (NBS), which he said showed that the
economy had relapsed into a recession with a decline of 0.3 per cent
year-on-year real terms.
He said the scorecard showed a drastic drop from 2.11 per cent in
the gross domestic product (GDP) of the fourth quarter of
2015. According to him, unemployment rate rose from 10.4 per cent in the
fourth quarter of 2015 to 12.1 per cent in the first quarter of 2016,
while underemployment also rose from 18.7 per cent in the same period to
19.1 per cent.
Furthermore, he said inflation rose from 9.6 per cent in January
2016 to 13.8 per cent in April 2016, while prices of commodities had
continued to be on a geometric rise.
Akpan said aside the high inflation rate, the declining GDP and
rising unemployment rate were indices of unfruitful economic policies,
which he said required an urgent review if the government cared to avert
further economic recession.
The senator also argued that the current economic situation was the
first major crisis of the Nigerian economy since 2004, which he said
the CBN classified as 12-year low, while the World Bank called it
21-year low.
Source: ThisDay
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