Nigeria’s central bank governor, deputies spat over fx policy

There appears to be rumblings at the central bank of Nigeria (CBN) over the prevailing foreign exchange management policy adopted recently to curb speculations, arrest the local currency drift and conserve forex reserves.

Emefiele

While the bank governor, Godwin Emefiele was bullish on the administrative measure to stabilise the exchange rates of the naira, his deputies are not on the same page with him on the policy.
An analysis of the reports of the last monetary policy committee (MPC) meeting showed that majority of the deputy governors were in favour of a more liberal approach to the management of the foreign exchange market. Some of them actually advocated the lifting of the tight exchange control.
The regulatory bank currently has four deputies, assisting the governor in the discharge of the core mandate of the bank of maintaining price stability.
Sarah Alade, whose portfolio include the supervision of the Trade and Exchange department of the bank subtly advocates the relaxation of the tight demand management of the foreign exchange resources.
“In order to encourage capital inflows and improve macroeconomic fundamentals there is urgent need for a liquid, efficient and competitive foreign exchange market that will ultimately lead to improvement in resource allocation,” Alade said in her contribution.
Most offshore investors and analysts have continue to ask the central bank to abolish the anachronistic approach to foreign exchange management and introduce a more flexible and transparent system of market determine mechanism to enable the naira find its true level.
The current situation in the market where the central bank has resorted to rationing the available hard currencies is stifling growth and development in the economy as most businesses are finding it difficult to source raw materials and machinery for their activities.
JP Morgan has threatened to eject the country from its Government Bond Index by the year-end unless it restores liquidity to currency markets in a way that allows foreign investors tracking the benchmark to transact with minimal hurdles.
JP Morgan, which runs the most commonly used emerging debt indexes, placed Nigeria on a negative index watch in January and then said it would assess its place on the index over a three to five months period.
"Nigeria's status in the GBI-EM series will be finalized in the coming months but no later than year-end," JP Morgan said two months ago.

Alade

Removal from the index would force funds tracking it to sell Nigerian bonds from their portfolios, potentially resulting in significant capital outflows. This in turn would raise borrowing costs for Africa's largest economy, already suffering from a sharp drop revenue following a plunged in oil prices.
On his part, central bank deputy governor corporate services, Adebayo Adelabu suggested the need to build confidence in the economy to boost offshore investment flow through the conversion of portfolio to direct investment to the advantage of the economy.
“A critical issue at this point in time is the need to build confidence in the entire economy as such could lead to conversion of some of the portfolio investments to foreign direct investment,” Adelabu said
He noted that the entire mechanism of foreign exchange allocation ought to be reviewed with a view to enhancing policy consistency, adding that efforts should be made to ensure that all obstacles inhibiting the effectiveness and efficiency of the current framework are removed.
“A major challenge to the current framework is the wide and unacceptable premium between the interbank and the BDC rates. The premium should be narrowed after which some flexibility could be introduced into the interbank market, possibly by widening the band,” he said.
Suleiman Barau, deputy governor in charge of operations voted in favour of a guided flexibility in the foreign exchange management mechanism.
“I would rather prefer a guided flexibility in the market such as the widening of the band around the interbank rate,” he noted.
According to him, overtime, with domestic production of goods, excluded from the interbank foreign exchange market, demand pressure would reduce and convergence of the two rates would be feasible.
The central bank in its quest to curb speculations and stem naira depreciation had exempted about 41 items from eligibility to the foreign exchange at the official market in July.
“In the meantime, rather than further devaluation, effective monitoring mechanism should be put in place to prevent round tripping and the attendant arbitrage opportunity as well as continuance of the demand management measures. In addition, the Bank should not hesitate to make appropriate sanction in respect of any infraction on the part of all the agents in the foreign exchange market,” he stated.
Joseph Nnanna, deputy governor in charge of financial system stability also voted on the side of flexible but guided management of forex market.
“Market conditions and anecdotal evidence seem to suggest that the demand pressure in the forex market is not likely to abate in the near term despite stringent application of the demand management policy measures recently introduced.”
According to him, “I saw merit advocating for the implementation of a policy of ‘guided’ flexibility in the determination of the naira/dollar exchange rate in the interbank market in order to induce greater supply of forex higher liquidity in the interbank market.”
Sources however noted that the governor chose the path of tight control as an interim measure pending the unveiling of President Mohammadu Buhari economic direction.
“The governor is currently in the dark on the policy direction of the government and he does not want to offend the government, hence the temporary measure to stem naira depreciation,” a source close to the central bank said.
Emefiele, the source said was not even sure of his standing with the president and would not do anything to jeopardise his tenure, which remain uncertain under the present dispensation.