CBN Governor, Mr. Godwin Emefiele
The
Monetary Policy Committee of the Central Bank of Nigeria on Tuesday
bowed to pressure by devaluing the naira from N155 to N168 to the US
dollar.
The MPC tightened the apex bank’s
monetary policy by allowing some flexibilities in the exchange rate to
stem speculative activities and depletion of reserves.
The announcement was made by the CBN
Governor, Mr. Godwin Emefiele, while briefing journalists shortly after
the MPC meeting at the bank’s headquarters in Abuja.
The bank also increased the Monetary Policy Rate from 12 per cent to 13 per cent.
The MPR is the anchor rate at which the
CBN, in performing its role as lender of last resort, lends to Deposit
Money Banks to boost liquidity in the banking system.
By this increase of 100 basis points in
MPR, the cost of funds to the banking system from the apex bank has now
increased thus, leading to an increase in lending rate from commercial
banks to businesses.
Emefiele also said given the level of
excess liquidity in the banking system, it becomes imperative for the
CBN to address the sources of foreign exchange demand pressure.
To achieve this, it devalued the naira
by moving the midpoint of the official window of the foreign exchange
market from N155 to N168 to a dollar.
He added that the committee also
approved a widening of the band around the midpoint by 200 basis points
from +/-3 per cent to +/-5 per cent.
Another decision reached at the end of
the two-day meeting, according to him, is an increase in the Cash
Reserves Requirement on private sector deposits by 500 basis points from
15 per cent to 20 per cent with immediate effect.
The bank also retained the public sector
CRR at its current level of 75 per cent; maintained the symmetric
corridor of +/- 200 basis points around the MPR, retained both the
public sector CRR at 75 per cent and the foreign exchange trading
position at one per cent.
“The committee was of the opinion that
the economy stood to gain by further tightening of monetary policy
stance to anchor inflation expectations; and some flexibility in the
exchange rate to stem speculative activities and depletion of reserves.
“Consequently, the Committee decided as
follows; increase the MPR by 100 basis points from 12 to 13 per cent,
increase the CRR on private sector deposits by 500 basis points from 15
per cent to 20 per cent with immediate effect; move the midpoint of the
official window of the foreign exchange market from N155/US$ to
N168/US$,” he said.
Naira devaluation
In devaluing the country’s currency,
Emefiele said the committee considered the fact that the falling oil
price had reduced the accretion to external reserves, thus constraining
the ability of the bank to continually defend the naira and sustain the
stability of the exchange rate.
He said while the supply side had been
further weakened by the commencement of normalisation of monetary policy
by the United States Federal Reserve following the termination of the
third quantitative easing on October 29, 2014; the pressure from the
demand side of the foreign exchange was aided mostly by the excess
liquidity conditions in the banking system and speculative activities.
For instance, he said it had become
increasingly worrisome that improvement in liquidity conditions in the
banking system, which was designed to enhance the resilience and
stability of the banking system, had not translated into increased
credit expansion to the real sector to engender inclusive growth and
boost employment.
Rather, he lamented that this liquidity
had led to an upward pressure in the foreign exchange market and
Standing Deposit Facility window of the Bank thus making deposit money
banks to continue to exercise caution in their approach to lending.
The CBN governor said a banking system
with an overly high profit motive negates the core tenets of banking and
purpose of a banking licence, noting that under the current
circumstance, monetary policy must be bold and emphatic.
He said, “The current situation demands
that the Bank confronts the issue of declining external reserves head-on
in order to strengthen the value of the domestic currency.
“Consequently, stabilising prices and
maintaining exchange rate stability and charting a sustainable path for
medium to long-term growth are the immediate top priorities.
“In the committee’s opinion, a more
flexible naira in the face of non- existent fiscal buffers was the most
viable policy option at a time of heightened demand pressure for foreign
exchange and falling oil prices.
“The committee was, therefore, of the
view that if it failed in taking the right policy actions now, the
market would force the Bank to take more drastic actions in the future
with far less foreign exchange reserves.
“Also, given the level of excess
liquidity in the banking system, it becomes imperative for the Bank to
address the sources of the foreign exchange demand pressure.”
The CBN governor called for a
diversification of the economy, adding that Nigeria had no business
importing rice, fruit juice and milk.
He lamented that the importation of these three products was putting intense pressure on the naira.
He said, “We have seen reserves
pressures coming from $39bn to $36bn. It’s unfortunate that the
pressures have come. But I think what could have been done, we could
have taken measures to diversify our economy.
“There is a need for us to diversify.
Why should we be importing rice? Why should we be importing fruit juice
into the country? Why should we be importing milk?
“In fact, before I was born, milk was
being imported. What rocket science do we need to produce milk. It is
just for people to get committed and embrace agriculture.
“I must confess that at this stage, we
don’t have a choice, we must have to embrace import substitution before
we talk of export-oriented industrialisation.”
Fuel subsidy removal
The governor said the committee was of
the view that the softening crude oil prices could provide necessary
leverage for the fiscal authorities to reduce budgetary outlays on fuel
subsidy and channel such savings to growth enhancing sectors of the
economy.
He said, “The committee also noted that
unlike in previous episodes, the current downturn in oil prices is not
transitory but appears to be permanent; being a product of technological
advancement.”
For instance, he said currently, the US
which used to be Nigeria’s former major oil export destination now meets
an average 80 per cent of its domestic oil demand from local shale oil
retorting technology production.
The US, he revealed, also exports over eight million barrels of crude oil daily.
He said, “The committee took note of the
supportive fiscal stance in this regard and public commitment to take
advantage of the low oil price to reduce fuel subsidy spending and
liberalise prices as in many emerging economies.
“Furthermore, the Committee expressed
satisfaction with the recent demand management measures announced by the
fiscal authorities to contain pressure in both the goods and money
markets and provide some respite in the near term.”
$73 oil price benchmark too optimistic
In the light of declining oil prices,
the CBN boss said the committee was of the view that the oil price
benchmark of $73/barrel proposed in the 2015 Federal Government budget
might be overly optimistic.
Emefiele said in view of the fact that
prices of oil might further decline, there was the need for considerable
caution on the budget’s revenue projections.
He argued that a weak public finance
may impinge adversely on growth prospects as it might lead to reduction
in critical public and private consumption and investment spending.
The CBN boss said, “People are not that
optimistic that this drop will continue particularly given what is
happening in the Middle East – the fact that for instance if Iran
reaches its deal with the US and other stakeholders that it is
negotiating with that the supply of crude into the market will further
increase and this will further create further reduction in crude prices
and will also have adverse consequences on the economy.
“That reason, we just feel that we need
to put it on notice that the $73 per barrel that has been anchored for
the benchmark for the budget looks good but not that pessimistic enough.
“I think it is good for you to be
pessimistic because when you are pessimistic, you protect your downside
rather than being optimistic and leave your downside open and when the
risk eventually occurs, you find out that you have a problem.”
He noted that the CBN would work with
the Federal Government to ensure that the austerity measures which were
unfolded recently would not have negative effects on the people.
Emefiele said, “A couple of measures
have no doubt been taken by the fiscal authority talking about the
austerity measures, trying to look at other means by which we can raise
our non oil revenues, imposing certain taxes on luxury items.
“ Nothing is too much in terms of
contributing to keep the economy running well but I think that there are
other measures that could be though about that would help the
situation.
“We will work together to see how this tightening and the austerity measures do not get too hard on our people.”
Insecurity, a threat to growth outlook
On the growth outlook, the CBN governor
said the committee noted the robust expansion in domestic output in the
third quarter of 2014 against the tepid growth in the global economy,
but cautioned that the continuing insurgency in the North-East in
combination with other risks could adversely affect the growth outlook.
He stated that the growth had been
anchored by the improved performance in services, agriculture, trade,
and industry, and called for a passage of the Petroleum Industry Bill to
unlock the potential of that sector of the economy.
Given the not too impressive fiscal
revenue outlook, the committee, according to him, challenged the
sub-national governments to seize opportunity in drop in revenue to
reduce reliance on allocations from the Federation Account in funding
their operations.
To this end, the committee commended the
efforts of some states which recorded unprecedented growth in their
Internally Generated Revenues in 2013.
Consequently, it enjoined other states
to emulate those states by strengthening their IGR mechanisms with a
view to minimising their reliance on FAAC allocations with attendant
disruptions to their budget implementation arising from dwindling oil
revenues.
However, he said the 2015 fiscal period
would witness further tightening in money supply unless there is an
improvement in the global economy.
Emefiele added, “For 2015, we would
continue to monitor the situation. What I foresee is that the tightening
measures will continue unless we see an improvement in the global
economy particularly in the area of oil price where we are getting some
vulnerability.
“But we will continue to monitor it but what I’m saying is that in 2015, we would continue in the path in terms of tightening.”
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