CBN Includes Power Firms in 60% FX Allocation, Retains MPR at 14%

Foreign reserves rise to $28.9bn, MPC urges quick passage of 2017 budget

Ndubusisi Francis in Abuja and Obinna Chima in Lagos

Desirous of revamping the country’s ailing power sector, the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) yesterday told commercial banks and other authorised dealers in the foreign exchange (FX) market to include electricity companies in its FX allocation policy, which provides that 60 per cent of total FX inflows from all sources (interbank inclusive) should be channelled to the manufacturing sector.

This is just as the MPC, at the end of its first meeting in 2017, resolved to retain its monetary policy instruments. The MPC kept the Monetary Policy Rate (MPR) unchanged at 14 per cent, the cash reserve requirement (CRR) at 22.5 per cent, held the liquidity ratio at 30 per cent, and retained the asymmetric corridor at +200 and -500 basis points around the MPR.

Briefing journalists in Abuja, at the end of the 111th meeting of the MPC, the CBN governor, Mr. Godwin Emefiele, urged operators in the power sector to take advantage of the priority FX allocation given to the real sector to enhance their operations.

“The 60 per cent that has been set aside for all FX that is available to all the banks to manufacturers, we did that for a purpose because we felt that there is a need to support the manufacturing sector.

“There is a need to ensure that FX is made available to those that will provide jobs and get manufacturing and industrial output to grow. And I am happy that the recent data released by the National Bureau of Statistics has started to show that the Purchasing Manager’s Index (PMI) is looking upwards.

“The 60 per cent that is set aside for the manufacturers, I dare say that those in the power sector also qualify for that because they are importing plants and equipment or components for their transformers and generators.

“However, I do not mean generators that people will put in their houses and generate electricity for themselves. So we will appeal to the banks to look in their direction increasingly,” Emefiele explained.

He also expressed satisfaction with level of accretion of external reserves, which according to him currently stands at $28.9 billion.

Furthermore, Emefiele said the central bank would continue to work to implement policies that would bridge the wide gap between the interbank and parallel market FX rates.

“It is exciting to see this happen. But is there a need to float the naira? It is important to note that we have to manage the reserves. That means from time to time we will intervene in the market to make sure the exchange rate does not go beyond our expectations and those interventions will be to moderate the rates as necessary.

“The fact that we have started to see some accretion in the reserves does not mean we have to be reckless. We will continue the policy of ensuring that FX is made available to those who are importing raw materials, plants and equipment, those supporting the agriculture sector and not those who want to engage in what I regard as less important sectors,” he stated.

Continuing, he added: “It is important that I must not gloss over some of the things I have heard and read in the press regarding multiple FX rates: I have heard about budget rate, I have heard about black market rate and parallel market rate, I have heard about pilgrims rate, I have heard about airlines rate and all that.

“It is unfortunate and it is unfair that some of those we have read discussing this issues are those who have direct access to the CBN. What we would have expected is that they would have talked to us. But I know that they know the objective that they are pursuing is best known to them.

“The budget rate is forecast rate. A forecast rate or budget rate has always been there from history and it is the rate that is used just to determine the budget and like you should know, a budget is a forecast. It is tentative.

“That is why I don’t understand why people would use the budget rate and say it determines the exchange rate in the market. The parallel and BDCs rates as far as I am concerned are one rate, and I don’t understand the duplicity about the rate.”

Earlier, while reading the MPC communique, Emefiele said the committee was of the view that the key undercurrents – that is scarcity of FX, low fiscal activity, high energy prices and the accumulation of salary arrears – could not be directly ameliorated by monetary policy actions.

He said the committee had also anticipated that the recent increase in oil prices would be complemented by production gains to provide the needed tailwinds to sustainable economic activity.

In that regard, the committee commended the commitment of the fiscal authorities to step up efforts to fill the aggregate demand gap through a speedy resolution of the domestic indebtedness of the federal government to states and local contractors.

The committee, he added, believed that doing so would aid the effort towards economic recovery.

“Total foreign exchange inflows through the CBN increased significantly by 82.45 per cent in December 2016, owing mainly to the increase in oil prices. Total outflows, however, spiked during the same period.

“The committee noted that the average naira exchange rate remained stable at the interbank segment of the foreign exchange market in the review period.

“The medium term outlook based on available data and forecast of key economic variables indicated a more resilient economy in 2017. Growth is expected to turn positive in fiscal 2017, as prior policy lags converge and the fiscal space becomes more accommodating.

“In addition, the agricultural sector is expected to play a bigger role in driving growth, given the expansion of the Anchor Borrower’s Programme, as well as other developmental initiatives of the government.

“Likewise, the prospects for moderation of price developments appear to be strengthening on the heels of positive developments in the food sub-sector.

“The committee re-assessed the headwinds which confronted the economy in 2016 and the opportunities for recovery in 2017. In particular, the MPC evaluated the implications of the rising wave of nationalistic ideologues across the West, the re-evaluation of trade agreements and the possibility of rapid monetary policy normalisation in the United States, with adverse consequences for other countries, including Nigeria.

“In recognition of the seemingly inevitable structural shift in the global economy, the committee reiterated the need to be more inward looking and hasten efforts towards economic diversification to support the domestic economy and improve life for the Nigerian people.

“Consequently, members acknowledged the imperative of sectoral policies and greater coordination of monetary and fiscal policy.

“The committee further noted that inflationary pressures would begin to subside as non-oil output recovers and the naira exchange rate stabilises. Until then, it stressed, a rate cut would worsen the inflationary conditions and undermine the current outlook for stability in the foreign exchange market.

“The committee also feels that doing so would further aggravate demand pressures while undermining existing income levels in the face of the already expansionary monetary policy and increasing inflationary pressure which will make the economy unattractive for foreign and domestic investments.

“Given these limitations, the committee was reluctant to lower the policy rate on this occasion but remained committed to doing so when the conditions permit.

“The MPC urged the management of the central bank to engage industry operators to discuss likely issues of asset quality, credit concentration and high foreign exchange exposures,” Emefiele added.

According to him, the MPC also urged relevant authorities to ensure the quick passage of the 2017 budget and to seriously consider using the public private partnerships in its infrastructure development programme.

Such a step, he said, would cushion the economy against any possible shocks in the event of a shortfall in budgeted revenue.

Responding to questions, he stated that importers of industrial raw materials, equipment and agricultural input would continue to be given priority in FX allocations.

The nation’s foreign reserves, he said, had risen to about $28.9 billion due to rising oil prices, noting that in spite of this, the CBN would continue to be prudent in managing the foreign reserves.

Analyst’s Reaction

Reacting to the outcome of the meeting of the MPC, the chief executive officer of Afrinvest West Africa Limited, Mr. Ike Chioke, yesterday said Nigeria’s present economic environment does not support a fully flexible exchange rate regime.

He also said it would lead to massive capital outflows, thereby leading to pressure on the FX market.

Chioke, who spoke in Lagos during the launch of the 2017 Outlook by his firm, said for a fully flexible exchange rate regime to be effective in the country, there was need for large scale reforms in sectors such as the oil and gas, power, mining, as well as significant improvement in the level of governance in the country.

“Actually, if you look at what the CBN has tried to do in the exchange rate environment, I believe they have tried given all the challenges they are faced with. If they were to go to a fully flexible exchange rate in the Nigerian economy today, I would probably be against that.

“You know why, it would be trying to solve the problem on the fringes. When you do that, all the capital would just fly out.

“To adopt a flexible exchange rate, you need to impose some massive reforms in some of the key sectors that would help to attract dollars. You can’t manage in one dimension. You have to remember that your problems are multi-dimensional.

“So, as you are trying to fix this one, remember that the other one might be opening up.

“So, a reform that focuses on large scale reforms is what the country needs before we can allow the exchange rate to float.

“Once upon a time, we were actually close to that. There was a time when between Soludo and Sanusi, we could have done that. We were getting to that sweet spot. The naira was even appreciating, but we lost that opportunity,” he said.