The Central Bank of Nigeria said Tuesday that it would adopt a more flexible foreign exchange policy, which is a tacit way of abandoning the current official exchange rate regime of N197/dollar.
The CBN took the measure following severe pressures on external reserve and foreign exchange supply crisis, which has hit the Nigerian economy hard, with all major economic indicators pointing south..
CBN governor, Godwin Emefiele, while briefing journalists after the two-day Monetary Policy Committee meeting, said the apex bank would release a new guideline on the management of foreign exchange in the country within the next few days.
Emefiele also announced that the also said the Monetary Policy Rate, MPR, was retained at 12 per cent; Cash Reserve Ratio, 22.5 per cent; and Liquidity Ratio, 30 per cent.
The MPC mandated the CBN to adopt a flexible exchange rate system, to allow for inflow of foreign exchange and needed investment.
By abandoning its fixed rate policy in favour of a flexible and multiple market model, the bank has opted a floating exchange rate regime, which offers more wiggle room for effective forex rate re-engineering.
Emefiele said that following the recent depreciation in the country’s foreign exchange, time had now come for the bank to introduce greater flexibility in the management of foreign exchange.
He said that under the new flexible forex policy, the bank would only retain a small window to enable it fund critical transactions such as importation of vital machinery for production for companies whose basic raw materials are almost entirely locally sourced or that are critical for manufacturing which by their nature cannot be sourced locally.
Under this new regime, the interbank foreign exchange market, which has been dead for sometime now, will come alive again, but on unrestricted exchange rate basis, while the Bureaux de Change, BDCs, would continue their operations, thus creating multiple exchange windows.
The CBN governor however was emphatic that funds would not be channeled to the BDCs.
Emefiele said that “the MPC voted unanimously to adopt a flexible exchange rate policy to restore the automatic adjustment properties of the exchange rate,” adding that it voted also to “retain a small window for funding critical transactions” and that “details of operations of the market would be released by the Central Bank at the appropriate time.”
“The committee noted that it was time to introduce greater flexibility in the foreign exchange market. The committee re-affirmed commitment towards maintenance of price regulation,” Emefiele said.
“The committee said, in the period of stagflation, the options are very limited and the committee decided on the least risky option. The MPC voted unanimously to adopt a flexible exchange rate policy,” it said.
Emefiele said that the apex bank would unveil plans for the flexible exchange rate system in the course of time, adding that the implementation of budget 2016 will further reflate the contracting economy.
He said: “The Committee recalls that in July 2015, it had hinted on the possibility of the economy falling into recession unless appropriate complementary measures were taken by the monetary and fiscal authorities.
“Unfortunately the delayed passage of the 2016 budget constrained the much desired fiscal stimulus, thus edging the economy towards contractionary output. As a stop-gap measure, the Central Bank continued to deploy all the instruments within its control in the hope of keeping the economy afloat.
“The actions, however, proved insufficient to fully avert the impending economic contraction. The condition that led to the contractions in the first quarter of 2016 – still largely the recession which was signalled in July 2015 – now appears imminent.”
Speaking on the coordination between fiscal and monetary policy, the CBN governor said: “The authority certainly knows what to do but one of the contributory factors is the delay in passage of the budget which has created a few distortions in the system.
“As you know, when budget is passed, monies will be available for capital projects and consumer purchases will increase. You can imagine a budget which should have been passed in January being passed in May, but I believe that this will be the last time that this will happen.”
He promised to unveil more details on the flexible exchange rate policy in the coming week.
According to him, “The flexibility we are talking about – we hope to avail more details in the coming days – BDC are part of the foreign exchange market but I am not saying that we are going to restart funding of BDCs operations. They will continue to operate at the autonomous market.
“We are going to provide foreign exchange for the importation of machines for products whose local materials are sourced 80 per cent locally. We will support attempt by people to set up factories, create direct investment; we will provide the incentive that they need to produce and stimulate growth. However, we are not going to support buyers who seek Forex to import almost all of the raw materials.”
The naira weakened slightly yesterday selling at N346/$1 from N345 which it sold on Monday.
