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CBN Over-stretched By Forex Upwind, Inflation



The 2017 saw the Central Bank of Nigeria (CBN) battle severe foreign exchange crisis following the dwindling global oil prices and exit of Foreign Portfolio Investments (FPI). KAYODE TOKEDE writes on key policies of the apex bank that redirected the nation’s economy on the path of recovery.

Nigeria experienced its worst economic recession in 29 years beginning from 2016. The economic disaster which lingered till the second quarter of 2017 was largely caused by global oil price decline that led to massive outflow of foreign investors.

Global oil price continued to drop as the nation’s economy was confronted with decline in oil production due to frequent attack on oil and gas facilities in the Niger-Delta region, which also contributed to the drop in revenue.

In August 2016, The National Bureau of Statistics (NBS) official gross domestic product (GDP) figures for the second quarter of 2016 had confirmed that the Nigerian economy was in recession.

According to NBS, the GDP contracted by 2.06 per cent in the second quarter of 2016, following a contraction of 0.36 per cent in the first quarter.

The situation then which became more pronounced in the first quarter of 2017 was worsened by the low global oil price which is Nigeria’s major source of income.

Also, inflation rate increased significantly from 18.55 per cent in December 2016, to 18.72 per cent in January 2017, the bureau said, while persistent reduction of the country’s external reserves seemed irreversible.

Foreign exchange crisis was also pronounced as the naira was under intense pressure which saw to its decline to an all-time low.

During this period, the naira, which used to exchange for N180 to a dollar, traded for as high as N520 and N525.

With inflation already doubled from nine per cent to over 18 per cent, the apex bank made several policies and adjustments to save the face of the Nigerian currency.

All these steps combined with increasing crude oil prices, which increased the level of government income resulted in getting the local currency to N365 against the the US dollar.

In February 2017, the CBN provided direct funding to commercial banks to meet the needs of Nigerians for personal and business travel, medical needs, and school fees.

CBN directed that such retail transactions be settled at a rate not exceeding 20 per cent above the interbank market rate.

In April, the CBN commenced twice weekly foreign exchange sales to bureaux de change (BDCs) to $10,000 from $5,000. It was later increased to $40,000, in a move to to sustain liquidity in the foreign exchange market.

The second quarter also saw the country exiting a biting economic recession as well as the CBN’s introduction of Investors’ and Exporters’ (I & E) foreign exchange window which made its easy for investors to trade the greenback.

Furthermore, between May and June, the CBN approved foreign exchange injection for invisible segment and banks became primary foreign dealers.

Following the CBN strategies to stabilize the naira, the impact was felt at the end of the second quarter of 2017, as the GDP figures grew by 0.55 per cent.

According to NBS, the GDP figures for the third quarter of 2017, saw the economy grew by 1.4 per cent (year-on-year). In real terms, the second consecutive growth since the emergence of the economy from recession in the second quarter of 2017.

The growth recorded in the third quarter of 2017 was 3.74 per cent points higher than the rate recorded in the corresponding quarter of 2016 ( -2.34per cent) and higher by 0.68 per cent points from the rate recorded in the preceding quarter, which was revised to 0.72 per cent from 0.55 per cent.

Other recovery indicators include improved Purchasing Manufacturing Index (PMI); slow inflation rate growth; stronger monetary policies; increase in foreign reserves; a comparatively stronger currency, and agriculture interventions, attributable to CBN’s Anchors Borrowers’ scheme.

According to CBN, the PMI in the month of November 2017, stood at 55.9 index points indicating expansion in the manufacturing sector for the eight consecutive months.  Notably,  the situation as of the beginning of the year was different as the PMI stood at 48.2 index points in January 2017, indicating a decline in the manufacturing sector during the review period.

Inflation rate witnessed a downward slide in 2017 due to the gradual recovery of the Nigerian economy.

As of November this year, for the 10th consecutive month, inflation rate continued on a downward trajectory, recording a marginal decline to 15.90 per cent in November, as against the 18.72 per cent it was as of January 2017.

As of November, NBS had explained that the Consumer Price Index (CPI), which measures inflation increased by 15.90 per cent (year-on-year) in November, 0.01 percentage points lower than the rate recorded in October (15.91) per cent.

The Monetary Policy Committee (MPC) met a total of six times in 2017 and kept the Monetary Policy Rate (MPR) unchanged at 14 per cent; Cash Reserve Ratio (CRR) at 22.5 per cent and Liquidity Ratio at 30 per cent.

The MPC decision was to challenge external conditions and downside risks in the domestic economic environment.

The CBN governor, Mr. Godwin Emefiele pointed out the MPC took into consideration several factors in arriving at its decisions.

He noted that although tightening would strengthen the impact of monetary policy on inflation with complementary effects on capital inflows and exchange rate stability, it nevertheless could also potentially dampen the positive outlook for growth and financial stability.

The committee had felt that loosening would worsen the current account balance through increased importation.

Emefiele noted that the developments in output and inflation in particular required effective close monitoring in order to gain clarity on the medium term optimal path of monetary policy.

Clearly, the CBN continued to maintain a tight monetary policy regime in its quest to continue to attract portfolio inflows.

The nation’s external reserves grew by $13.73 billion in 2017, from $26.09 billion as of January 3, to $39.82 billion presently.

The accretion was driven by increased portfolio inflows, rise in global oil prices, success of the country’s Eurobond offerings as well as improved diaspora remittances.