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CBN: Mixed reactions greet flexible exchange rate


 Buhari 4

By Ada Anioji


The latest move by the Central Bank of Nigeria, CBN to adopt a new flexible exchange rate regime in the country is eliciting mixed reactions from Nigerians.

Hints on the new flexible exchange rate regime was disclosed to the nation after the meeting of the Monetary Policy Committee (MPC) which was held at the beginning of the week.

While some Nigerians are expression their state of confusion over hoew exactly the policy would work, others are speculating that it could either mean that the long-dreaded process of devaluing the naira may have begun or that the apex bank has now re-introduced the controversial Second Tier Foreign Exchange Market, SFEM.

Meanwhile, hours after the commencement of the new flexible exchange rate system, the naira depreciated against the dollar and the pound.

On Wednesday, the Nigerian national currency depreciated by N3, dropping from its earlier rate of N344 to the dollar which it had traded at the parallel market in Abuja on Tuesday, to a new figure of N347 for each dollar exchanged.

In Lagos, it was a similar N3 loss as the naira depreciated from N347 to N350 in its trading values relative to the dollar.

A point of confusion in the new policy regime has to do with the concept of an official exchange rate, which some analysts averring that its retention could yet promote the destructive practices of round-tripping and graft. At the official rate on Wednesday for example, the CBN disbursed the dollar at 197, while the pound moved from 285 to 288 and the Euro appreciated to 221 from the earlier base of 220.

Meanwhile, the Nigerian Stock Exchange (NSE), responded positively to the MPC decisions, with the All Share Index (ASI) rising from 27,232 on Tuesday to 28,164 on Wednesday.

 All of the adjustments is however coming against the backdrop of the MPC’s warning of imminent recession, saying that the new flexible exchange rate regime is one of the surest bets to halt the dangerous slide in the nation’s financial and economic fortunes that has been experienced for some time now.

“The committee expressed concern over sustained pressure in the foreign exchange market and the necessity of implementing reforms to engender greater flexibility of rate and transparency in the operation of the inter-bank foreign exchange market,” Godwin Emefiele, governor of the bank, said.

The MPC said the monetary policy rate (MPR) and cash reserve ratio (CRR) would remain at 12 percent and 22.5 percent respectively. Liquidity ratio was also held at 30 percent.

In their reactions, some financial houses have lauded the flexible exchange rate policy adopted by the Central Bank of Nigeria (CBN), saying it would boost forex liquidity and stabilise the Naira.

The hope-mongers include Vetival Capital Management Ltd. and Cowry Asset Management Ltd.

They say that the decision would lead to increased dollar inflow in few days.

Specifically, the Head, Research, Vetival Capital Management Ltd., Mr Pebina Yinkere, aserted that the policy would curb profiteering and also improve foreign exchange liquidity in the system.

 “Overall, we view this development as positive for Nigeria,” Yinkere added.

 On its part, Cowry Asset Management Ltd. said it was confident that the policy would impact on the economy in several ways.

 It said it expected the current inflationary pressure to continue unrestrained as budgetary disbursement commences.

According to the firm, interest rate is expected to continue to hover at current levels with an increased double digit outlook.

“This is likely to increase in liquidity mop-up through Open Market Operations (OMO) in response to expected increase in budgetary spending.

“The Naira might remain under pressure as market forces adjust to a more realistic parallel market rate.

“The decision would likely attract foreign exchange inflows estimated at 20 billion dollars from domiciliary accounts as currency exchange risk minimises,” it said.

It added that capital market activities would witness gradual recovery as foreign exchange risk diminishes.

Explaining how the system would work, a source who would not be named said that under the fiscal regime, the national currency, the naira would be allowed to float within an agreed band which would not be interfered with at whims by government.

One of the problems we have had in the past is that currency management was in the hands of a tiny cabal that was given to indiscriminate hiking and fixing of the rates to promote selfish designs . Under this arrangement, round-tripping and arbitrage was the order of the day and as such the real sector and the bulk of the masses could really never benefit, our source observed.


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