Buhari and foreign exchange policy

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) held its third meeting of the year last week with a second major economic policy shift following the deregulation of fuel prices by President Muhammadu Buhari.

Analysts see the development, which may be a response to the imminent recession, as softening of the hitherto rigid posture of the government on the naira dollar rate as the outcome signalled the return of a flexible interbank foreign exchange (FX) market.

That may mean the bank is set to introduce a dual-rate system, with the naira trading at a market-related level while the central bank continues to make foreign-currency available to some importers at a discounted rate.

The policy shift to flexible exchange rate is a welcome development and commendable as it shows that the country is itching gradually away from populist government syndrome.

The movement to a flexible exchange rate comes after the removal of the cap in petrol prices that saw prices rise to as much as N145 a liter from N86.5, earlier, a move welcomed by the business community.

Godwin Emefiele, CBN Governor said however that the apex bank would retain a small window for funding critical transactions while the details of the new framework will be released “in coming days.”

We advise that CBN should key into the applause that greeted the policy shift by government and release the details on time. This is because the release of the new pricing template for FX should result in an appreciation of the Naira in the Bureau De Change (BDC) segment as FX accessibility increases.

Also, because the sustainability of this rally will be contingent on the credibility and efficiency of the new market template as markets dislike uncertainty.

In recent months, investors were steering of clear of Nigeria with the attendant consequences of drought in foreign direct investments (FDIs) and continued depleting of the nation’s foreign reserves.

The timely release of the guidelines and effective monitoring and supervision by CBN will ensure that the market finds the right level for the naira as well as encourage investors to invest in Nigeria.

CBN had pegged the naira at N197-N199 per dollar since March 2015 as the country struggled to cope with a plunge in oil prices that contributed to the economy contracting in the first quarter of 2016.

But president Buhari had insisted that he needed serious convictions on the need to devalue the naira or price it appropriately before giving official backing.

However, it is obvious now that government cannot solve the fuel problem without addressing the FX issue and opening up the economy to investors.

However, some analysts insist that some structure should be put in place to clear the backlog of FX put at between $3 billion and $5 billion, before the interbank market is reopened.

Nigeria's Gross Domestic Product (GDP) declined by 0.36 percent from a year earlier, according to the National Bureau of Statistics (NBS) last week, compared with growth of 2.11 percent in the previous three months.

Investors had consistently warned that the capital controls imposed by regulators, were hurting the economy and constricting inflows and output.

The decisions of the MPC members were believed to be based against the background of steadily creeping inflation which rose to 13.7 percent in April the highest levels since 2010.