The members of the Monetary Policy Committee (MPC) have called on the Central Bank of Nigeria (CBN) to sustain liquidity in the foreign exchange market to further sustain the confidence of the economic agents already built and progress recorded in the market.
The members who participated in the last MPC held in March 2017 acknowledged that the CBN has recorded significant progress in the last one month with the rates in the two markets moving towards convergence zone.
Barau Suleiman, deputy governor, corporate services CBN, said this has been possible on account of increased funding of the interbank market as well as the re-ad mission of certain activities for eligibility in the interbank market.
He said any event that leads to reduction in the level of liquidity support for the interbank market could be wrongly construed by economic agents as lack of capacity on the part of the Bank to meet the demand in the market with severe consequence of erosion in the level of confidence. As such, appropriate framework should be in place to ensure timely intervention in the market in order to eliminate undue friction from insufficient liquidity.
“The concern here is that in as much as actual depreciation of the Naira would trigger inflation pressure, the expectation of economic agents in terms of the ability of the Bank to maintain stability in the exchange rate could act faster on inflation dynamics than the actual movements in exchange rate. To say the least, the confidence of economic agents in the ability of the Bank to maintain the current exchange rate is still at the lowest ebb”, Suleiman said in the March MPC communique with personal statement.
He said the pressure in the foreign market has eased considerably with the margin between the two markets narrowing to about 29 percent from as high as 60 percent. Although the new trend is a significant milestone, the margin is still high with the likelihood of getting higher if not well managed. A likely risk factor is the evolving stance of the US Fed which would significantly increase the flow of capital to the US to the detriment of most emerging economies.
Sarah Alade, former deputy governor, economic policy, CBN, said better management of the foreign exchange policy and the unification of multiple exchange rates is required.
According to her further reform in the interbank foreign exchange market is needed to allow for transparency and price discovery in line with the policies released in June 2016. This will attract the much needed capital into the economy and liquidity into the market and unify the multiple exchange rates.
In his personal statement, Balami Dahiru Hassan, member of MPC said “I proposed to hold and allow the operation of the previous actions such as new forex policy, to support output growth and to bring down the ratio of NPLs closer to the prudential threshold”.
However, he said in Nigeria, the stakeholders continue to accept the black market rate as the naira exchange rate between the dollar and the naira. The formalisation of the market would appreciably facilitate the channelling of available foreign exchange to productive sectors of the economy as well as promoting price stability in the economy. The black market rate and the depreciation of the naira have indeed distorted price stability and economic growth.
Suleiman noted that the banking sector has been extremely challenged by a number of risk factors which are not likely to diminish in the near term. The benchmark interest rate has been fairly high for a relatively long period and this, invariably, has started taking its toll in the asset quality of the banking system.
The data available at the March MPC meeting revealed a deteriorated situation of the financial system stability in Nigeria with capital adequacy ratio of 13.36 percent; NPLs of 13.59 percent; and liquidity ratio of 46.61 percent all lower than the last month’s figures depicting poor performance of the Nigerian financial sector.