Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, yesterday assured jittery investors that the CBN was “doing everything possible” to ensure that the country remained on the JP Morgan Index in order to avoid the adverse consequences which the country’s exclusion could cause.
For the second time this week, he was reacting to reports that the JP Morgan analysts had placed Nigeria on a negative watch for the next three to five months following reservations over the country’s foreign exchange position and the bond market which was described as illiquid.
But the CBN boss, who yesterday faulted the assessment by JP Morgan analysts, reiterated his objection to suggestions that the market was not liquid, arguing that the fact that the CBN recently altered banks’ Net Open Position (NOP) from 1% to 0% and then 0.1%, did not necessarily mean there had been no trading in foreign exchange.
He said the CBN would engage JP Morgan analysts to provide proof of the market’s liquidity. “I am very optimistic that they would see reasons with us,” he said.
However, the central bank, at the end of its Monetary Policy Committee (MPC) meeting, yesterday resolved to maintain the current monetary policy stance, leaving the Monetary Policy Rate (MPR), otherwise known as interest rate, unchanged at 13%.
It also retained the cash reserve ratio (CRR) on private sector deposits at 20% while CRR on public sector deposits was also left unchanged at 75%. Liquidity ratio (LR) was also retained at 30%.
Addressing journalists after the two-day meeting of the MPC, Emefiele said though the committee had expressed concern over the current security challenge in parts of the country, which has disrupted farming and related activities, the sustained decline in oil GDP, the recurring challenge of excess liquidity in the banking system, and possible complications arising from capital flow reversals, as well as the demand pressure in the foreign exchange market, it nevertheless resolved that its decisions at the November 2014 MPC meeting should be given time for the effects to crystallise in the economy before any adjustments could be made.
He said the committee further noted that on the external front, falling oil prices, slowing global output recovery, divergent monetary policy postures between the US and Euro area, as well as non-inclusive growth remained important risks.
“The gradual normalisation of monetary policy by the US Federal Reserve could exacerbate the current retrenchment of portfolio flows and increase pressure on currencies in emerging and developing countries including Nigeria,” he explained.
He said there had been significant pressure in the foreign exchange market in 2014 which resulted in further weakening of the naira across the three segments of the market.
As a result, he said gross official external reserves had declined to $34.25 billion as at December 31, 2014 compared to $42.85 billion in the corresponding period in 2013.
He blamed the decrease in reserves level to increased funding of foreign exchange market interventions to stabilise the exchange rate in the face of decline in reserve accretion.
Notwithstanding, he said the country’s external reserves could still finance about eight months of imports.
Reiterating the CBN’s position on the JP Morgan index, Emefiele said: “I have responded to this by saying that we disagree with the assertion that the market is not liquid.
“It is important to note that first of all, by the introduction or at the initial stage, reducing the net open position from say one to zero does not mean there was no trading.
“There was intra-day trading during that period but what we only insisted was that banks must close their positions to zero because of the volatility that we saw in the market during that period on the exchange rate.
“We could not allow that to continue because we also discovered certain uncomfortable tendencies in the market which portend that there were some speculative attack on the currency.
“That was the reason we took that decision and when we took that decision, we were very clear when we said that the net open position was being reviewed to zero at that time in the interim and that we would be monitoring the market.
“When business resumed this month and after a review of what happened in the market between December 17 and January 12, when net open position was zero, the Committee of Governors met and decided that we should review the net open position upwards to 0.1%.”
Continuing, he said: “I will like to seize this opportunity to repeat myself; that it is not cast in stone: we would continue to review the position.
“It is possible that even after this pronouncement, that as we review this situation and we have looked at the level of liquidity in the market and we feel comfortable with what is happening in the market, we may come up tomorrow to review the net open position upwards further.
“We repeat that we have a responsibility in line with our core mandate to defend the currency and exchange rate of the naira. We have also made it very clear that we are monitoring the market to the extent that we feel that the interbank market will continue to support trading activities of both Nigerians and foreign investors.
“That at any point when we discover that the market is unable to absorb or to provide the liquidity that is needed, the Central Bank of Nigeria will come up and intervene in the market to provide the liquidity that is needed for legitimate transactions to go on.
“We have a mandate to ensure transactions taking place in the market are only for legitimate transactions.
“Let me reiterate that we are committed to remaining on the index. We would do everything possible to continue to remain on the index because we know the adverse impact that the exclusion from the index will cause the country.
“What is paramount in our minds is that external reserves must be defended; the exchange rate policy must be defended; we would ensure economic activities continue to take place.
“Anybody who needs foreign exchange to transact business in the country would be allowed to do so but for legitimate purposes – we would not tolerate speculative attacks on the currency.”
On whether a further devaluation of the currency was imminent, the CBN Governor said: “We cannot dwell on that for now. It is again an issue that would be subjected to review from time to time.
“At this time, the naira is appropriately priced, and there’s no need for anybody to worry that there would be a devaluation. At this time, the currency is appropriately priced.
“Our assessment of the market since the last devaluation remains positive and I repeat that we are monitoring the market and we would ensure that all economic activities that take place in the market are supported by the CBN from time to time.”
On concerns over the widening gap between the official exchange rate and the interbank/parallel market rates, the CBN boss said: “We are aware of the gap, we are doing our best as much as possible to see how we could bridge the gap by intervening in the market because we know allowing the gap creates certain opportunities for certain people.
“And because we do not want the exchange rate to spiral out of control, that’s why we are watching it and at the appropriate time, certain actions would be taken.
“What action it would be, I don't know because that would again be the decision of the Committee of Governors. But we are monitoring it (naira) at this time and we will continue to take actions that would assist in bridging the gaps so that the exchange rate does not get out of control.”
On the impact of the monetary policy stance on the real sector which continues to groan under the high cost of funds, Emefiele who regretted the situation, said a concessionary window had been provided to cushion the effects of high interest rates.
“Unfortunately, we had to tighten because that was the only cause of action we could adopt during the November meeting when we discovered that there was a need to do so.
“We are very conscious of it and that’s why both the monetary and fiscal authorities remain committed, with the support of the Nigerian deposit banks, to intervening in the market in specific and sectors of the Nigerian economy.
“We would continue to support them with funds at concessionary prices so that the impact of the tightening in the money market or the banking system, which we know would naturally result in an increase in interest rate, will not be felt by them,” he said.
In a related development, the federal government said yesterday that it would not review the 2015 budget oil benchmark as volatility continues to hallmark the prices of the commodity in the global market.
Oil prices have continued a journey south from over $100 per barrel from the middle of June last year to under $50 per barrel.
The precipitous fall had resulted in the review of the initial oil benchmark of $78 per barrel submitted under the Medium Term Expenditure Framework (MTEF) to the National Assembly in September to $73 a barrel.
As the slide continued, the federal government was forced to further bring down the benchmark to $65 a barrel when the 2015 budget estimates were laid before the National Assembly early December.
But in a statement yesterday, the Federal Ministry of Finance said: “We are not reviewing the budget benchmark price at the moment. The price of oil is still quite volatile and we do not know how it will bottom out.
“We are taking a scenario-based approach in handling the 2015 budget. That means that for various levels of oil price, we have additional measures both on the revenue and expenditure side, which will kick in when it bottoms out.
“The Medium Term Expenditure Framework (MTEF) is currently at the National Assembly. We have been working together with our lawmakers to ensure that we steer the country in the right direction during this period.”
The Senate Committee Chairman on Finance, Senator Ahmed Makarfi, had recently told THISDAY that the final benchmark on which the 2015 budget would be predicated would be decided by the National Assembly.
Makarfi had argued that since the budget had been submitted to the National Assembly by the executive, it is now the responsibility of the federal legislature to decide whether it would approve the oil benchmark as submitted by the government or fix a new one.
The Coordinating Minister for the Economy and Minister of Finance Dr. Ngozi Okonjo-Iweala, had also last Thursday debunked a media report that the ministry had withdrawn the MTEF from the National Assembly.
She had described the report as baseless and as a figment of the writer’s imagination, urging Nigerians to ignore such rumour peddlers.
She had restated that both the MTEF and the 2015 budget were still in the custody of the National Assembly waiting for consideration, and expressed the ministry’s readiness to work with the lawmakers to enable them come up with a sound and sustainable budget.