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Forex pressure: CBN to intensify use of administrative tools

By on July 21, 2015

As the pressure faced by the naira in the parallel market becomes intense, analysts at Financial Derivatives Company Limited (FDC) have anticipated that the Central Bank of Nigeria (CBN) will increase use of administrative measures in its quest to protect the nation’s currency.

These administrative tools are the cash reserve ratio (CRR) and Open Market Operations (OMO).

The FDC stated this in a report obtained by THISDAY at the weekend. The CBN’s monetary policy committee (MPC), which is responsible for fixing interest rate and other monetary policy tools, would hold its meeting this Thursday and Friday.

According to the report, the CBN has already reached the upper limit of its tightening cycle, predicting that a probable outcome at the MPC meeting would be for the CBN to maintain the status quo and use more administrative measures in preserving the forex reserves.

“Even though the CBN is committed to defending the naira, the currency pressures facing Nigeria are becoming more intense. The spread between the interbank rate and the parallel market creates an arbitrage corridor for speculators, and is now a round tripper’s paradise. Another issue that is of concern is the consistent decline in oil receipts as a result of falling oil prices, when the sanctions on Iran are finally removed,” it stated.

The report also noted that the aftershock of the CBN’s restriction of importers’ access to foreign exchange at the interbank and bureaux de change forex markets would be felt in the coming months.
The National Bureau of Statistics last week released the official inflation rate for June 2015 at 9.2 per cent, a 0.2 per cent increase from May’s nine per cent. This higher inflation rate was widely expected, given the prolonged fuel scarcity and shortage of perishables.

“The rising inflation is likely to be aberrational but the trend is becoming more consistent and is fuelling the fear factor. Anticipated inflation is more important than historical inflation because it influences consumer behaviour and preferences. Demand for goods will increase if people expect prices to rise in the near future.

“As demand increases, producers would be forced to increase prices up to a point that there is a struggle of bargaining power. At this level, it is the price elasticity of demand that determines if there would be a further increase in prices. Another threat to inflation is the possibility and timing of the subsidy removal, which is now becoming more inevitable.

“We believe that the increasing inflationary trend is likely to extend into the third quarter. Besides the fuel scarcity problem that still lingers – albeit lightly, there has been sustained attacks from Boko Haram insurgents in the North-east, where many farm products (especially perishables) are cultivated.

“Lower food supplies would lead to a rise in the food sub-index of the consumer price index (CPI). The appointment of new service chiefs is expected to improve the security situation in the North-east,” it added.
It pointed out that increased demand for fruits during the Ramadan fasting period this month would lead to a seasonal rise in prices, stating that inflation in the near term would also be affected by the new restrictions in the forex market and the effective depreciation of the naira.

According to the report, with recent calls for an upward review of the current minimum wage of N18, 000, the Nigerian Labour Congress may intensify its demand for an increase in the national minimum wage due to the persistent inflation.

 

[ThisDay]