Stocks Rise, Naira Falls to N350/$ as Investors Await Flexible Forex Policy

• Senate laments economic recession, summons finance minister, CBN governor

Goddy Egene, Obinna Chima in Lagos, Omololu Ogunmade in Abuja

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.

He also recalled how the CBN had in March 2016, deployed a contracting monetary policy, which he said increased the benchmark for interest rate from 11 per cent to 12 per cent and also raised the cash reserve ratio from 20 per cent to 22.5 per cent, querying the rationale behind the contracting monetary policy instead of expanding it to boost economic activities at such a precarious times like this.

Akpan said if the persistent complacent state of the Nigerian economy continued unchecked, it would graduate into a full blown economic recession at the end of June 2016 in accordance with CBN alert, adding that non-availability of forex to boost the importation of raw materials for Nigeria’s domestic industries would only worsen the current unemployment and poverty rates in the country.

The senator further lamented that the declining oil production in the Niger Delta to the tune of 800,000 barrels per day against the backdrop of projected 2.2 million barrels per day as a result of the damages to oil pipelines, coupled with the incapacity of Federal Inland Revenue Service (FIRS) and Nigeria Customs Service (NCS) to meet their revenue targets as a result of cash crunch, would further worsen the situation.

Noting that naira had been completely devalued in accordance with the newly announced forex flexibility by the CBN while the exchange rate approved in the medium term and expenditure framework (MTEF) 2016-2018 remained N197 to $1, Akpan said the fate of ordinary Nigerians on the streets was uncertain.

He concluded his debate, saying that in view of the current economic recession, achieving key revenue projections in 2016 budget would be an illusion as he advocated the urgent need to strategise against budget deficit or poor implementation in this fiscal year.

Senate President Bukola Saraki, who presided over the session before later yielding his seat to his deputy, Senator Ike Ekweremadu, while on his way to the Code of Conduct Tribunal (CCT), disallowed a debate on the motion to avoid tension among the All Progressives Congress (APC) and opposition Peoples Democratic Party (PDP) senators.
However, while seconding the motion, Senator Biodun Olujinmi (Ekiti South) noted that the executive arm had no feasible economic policy.

According to her, everything was wrong with the economy, which she said had resulted in belated devaluation of the naira, insisting that Adeosun and Emefiele must not just appear before the Senate but that they must also come up with the federal government’s economic blue print.

But despite agitations from the floor by senators to debate the motion, Saraki declined the demand, saying merely passing a resolution through a voice vote to summon the government officials was enough.

Thus, when the issue was eventually put to a voice vote, it was passed amid dissenting voices.

The Senate also expressed concern over the indiscriminate dissolution of local government councils and their frequent replacement with caretaker committees by state governors.

It said the trend had always resulted in low morale and poor performance of the councils to the detriment of the people at the grassroots.