CBN remains hawkish on BDCs and FX arbitrageurs as MPC keeps rates stable – Businessamlive

  • Exchange rates now come from CBN, not speculators

  • Analysts say Nigerians and businesses face tough short-term period

The general expectations of the economic experts of the monetary policy committee (MPC) of the CBN were ultimately not exaggerated, as the committee moved in the direction anticipated by several analysts who had described maintaining all political parameters but softening its conciliatory tone, while taking into account several factors that could keep it reluctant to ease the stance of its monetary policy despite its implication for the economic recovery.

This meeting took place earlier than usual, almost as an emergency for this bimonthly meeting, at the end of which it chose to maintain the status quo by leaving the monetary policy rate (TPM) at 11.5%, the Cash Reserve Ratio (CRR) at 27.50 percent, the liquidity ratio (LR) at 30 percent, and the asymmetric corridor at + 100 / -700 basis points around the MPR for the fifth time this year and after eight meetings within 12 months.

The committee believes that the maintain position will allow the current policy measure to permeate the system and in turn support the resumption of growth and macroeconomic stability.

This stance was in line with analysts’ expectations as they entered the meeting of members, many of whom said the CBN would remain cautious in shifting the dynamics of monetary policy stance ahead of global systemic central banks, such as the US Fed and the European Central Bank. In addition, the CBN’s position also aligned with the idea that Nigeria’s fragile GDP recovery and the recent decline in the inflation rate would argue in favor of maintaining the policy in the short term.

Uche Uwaleke, economic expert and professor of capital market, said in a note to Business AM that it would be desirable to keep all policy parameters constant in order to stimulate economic recovery.

“I expect the MPC to maintain the status quo and retain all political parameters. It would have been desirable to reduce the TPM by a few basis points in order to revive the economy. But this path may not be taken given the current pressure in the forex market and the growing gap between official exchange rates, I&E, and parallel market rates.

“On the other hand, increasing the MPR at this time will hurt the recovery through increasing the cost of capital, especially for SMEs. It will also slow down the stock market, which is still experiencing a feeling of weakness among investors, ”he concluded.

A major point of discussion that was on the expectation table ahead of the meeting was the ban on sales of foreign exchange to exchange bureau operators (BDCs). At the end of the meeting, the CBN maintained its previous position and went further by asserting that banks have sufficient foreign exchange reserves to meet legitimate foreign exchange needs.

Given the central bank’s relentless reminders that foreign exchange trading outside the official market is illegal, as well as its tough stance on BDCs and the parallel market, several analysts argued ahead of the meeting that the regulator may remain reluctant. to reverse its previous decision. stop currency sales to BDCs, after the surprising turn of events in July, when the move was announced by Governor Emefiele in an attempt to stop the back-and-forth and dollarization of the economy.

In the past eight weeks since the July MPC meeting, the Naira has come under heavy pressure from the currency shortage in the currency market, resulting in increased import pressure on foreign currencies. As a result, the currency fell to its all-time low in more than four decades at N570 for the greenback on the parallel market. The fact that Nigeria is a net importer has put even more undue pressure on the foreign exchange market. But, that notwithstanding the fact that the umbrella bank has assured everyone of its decision to clean up the illicit foreign exchange markets.

According to Godwin Emefiele, “I’m sorry to say I don’t and I don’t intend to acknowledge that there are other rates in the market. Nigeria’s only recognized rate is listed at the investors and exporters desk, where legitimate demands for foreign currency are met. Selling foreign currency reserves, which is our community to bureau de change operators, is not a global good practice.

“We should really applaud ourselves for deciding that such bad decisions will end, and it has stopped for good. Most of the traders in the BDC segment encourage illegal activity and sponsor banditry in Nigeria due to the sales of foreign currency to BDCs. If the amount you want is even greater than the recognized limit; that we find out that the reason why you do such [a] the request is legitimate, your bank will talk to us and we will provide you with more than the limit, ”Emiefele said.

Analysts at Cardinalstone Partners, reacting to developments, said: “While we expect the outcome of the meeting to prompt some caution in the forex market, much more needs to be done to reduce the widening of the premium on the window of investors and exporters due to speculation. in the parallel market. It is necessary to increase the supply of foreign exchange to eliminate the existing arrears of demand in dollars and to restore relative calm on the market. “

Also reacting to developments in the halt in sales of currencies to BDCs, economic analysts at United Capital Research noted that there will be more pressure on the local currency as most Nigerian companies do not have access to currencies in markets, except streets and the BDC segment. .

“As the official market remains inaccessible to Nigerian companies that operate on items on the CBN’s foreign exchange restriction list, including key imports like rice, clothing and palm oil, the pressure on the rate parallel market is likely to persist over the medium term, ”they noted. .

The recent wave of events in the forex landscape in Nigeria has shown that some form of imbalance still exists as currency scarcity continues unabated in the forex market. This is not to hastily forget that the gap between parallel market rates and those on the I&E market, which may be over 20%, further reinforces the imbalances in the supply and demand equation. demand .

Some analysts have continued to maintain the position that the current precarious foreign exchange situation is exacerbated by spurious demand for currencies, the activities of speculators and aggressive practices, including overcharging of goods imported into the country.

Bismarck Rewane, CEO of Financial Derivative Company, in a monitored interview some time ago, noted that demand for FX, however, is driven by the emotion, fears and anxiety created by the rationing of FX. Rewane argued that rationing doesn’t help but gives the impression that there is a shortage somewhere.

The expert further noted that the unification of the exchange rate, maintaining parity and alignment will enhance the competitiveness of the Naira against Nigeria’s trading partners. “The exchange rates have not been unified. Some convergences are still in progress. Unification is when you have a single price. In other words, the demand for foreign currency in Nigeria today is not what it was in normal times and it is a matter of time for everyone to see the outcome of events in the markets. “, did he declare.

Meanwhile, whatever policies the umbrella bank is about to implement in an effort to achieve stability of the Naira against the dollar in all markets in keeping with its surprising action of cutting off everyone’s wings BDC operators, the jury is there to establish this position in the coming weeks.

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