- Title: Nigeria to adopt flexible FX regime, details to follow
- Date: 24th May 2016
- Summary: LAGOS, NIGERIA (FILE) (REUTERS) AERIAL VIEWS OF LAGOS
- Embargoed: 8th June 2016 17:41
- Keywords: Nigeria adopt flexible FX regime central bank economy currency naira
- Location: ABUJA,NIGERIA / LAGOS,NIGERIA
- City: ABUJA,NIGERIA / LAGOS,NIGERIA
- Country: Nigeria
- Topics: Currencies/Foreign Exchange Markets,Economic Events
- Reuters ID: LVA0044J6566L
- Aspect Ratio: 16:9
- Story Text: Nigeria's central bank abandoned its naira peg to the dollar on Tuesday (May 24) in favour of a flexible currency regime, a policy U-turn designed to boost local manufacturing and exports and stave off a recession.
However, Governor Godwin Emefiele sparked confusion in Africa's biggest economy by declining to say how the shift from a naira fixed at 197 to the dollar would be implemented.
Details would be published in a few days, he said after a Monetary Policy Committee (MPC) meeting in the capital, Abuja.
"The MPC voted unanimously to adopt a flexible exchange rate policy to restore the automatic adjustment properties of the exchange rate," he told a news conference.
He added that the central bank would "retain a small window for funding critical transactions". Again, he sowed confusion by saying details would only be released "at the appropriate time".
Analysts questioned the wisdom of announcing a major shift in policy without spelling out how to implement it.
The bank's de facto peg of 197 naira per dollar had become increasingly unsustainable due to a shortage of hard currency stemming from the slump in oil revenues.
Africa's top crude producer relies on oil for nearly three-quarters of its government revenue and more than 90 percent of foreign exchange.
On the black market, the naira is trading 40 percent below the official rate as manufacturers and imports pay massive premiums to avoid hefty official currency curbs now blamed for tipping the economy towards recession.
The dollar-hungry industry and manufacturing sectors shrank 5.5 percent and 7 percent respectively in the first quarter, helping pushing the economy into a 0.4 percent contraction, its worst performance in years.
Tens of thousands of contractors have been laid off as businesses have either closed down or shelved their investment plans.
President Muhammadu Buhari, a 73-year-old former military ruler elected last year, has resisted calls for devaluation throughout his first year in office.
But Vice President Yemi Osinbajo hinted at change this month, saying a more flexible approach was needed to spur growth. Buhari's spokesman declined to comment on the central bank's change in stance.
Osinbajo's comments, on the same day fuel prices were lifted by up to 67 percent to remove costly fuel subsidies, intensified speculation about an imminent change of heart.
On Monday, the oil minister stoked that further, saying it would use a lower rate of 285 naira per dollar for petrol imports rather than the pegged official rate of 197.
Emefiele admitted the economy was also likely to contract in the second quarter, falling into official recession, but blamed delays in implementing this budget for much of the decline.
He also kept its benchmark interest rate on hold at 12 percent and maintained the central bank's existing cash reserve ratios for commercial banks at 22.5 percent.
The Committee's Decisions
The Committee, in its assessment of the relevant risk profiles, came to the conclusion that although, the balance of risks remains tilted against growth; previous decisions need time to crystalize.
Consequently, in a period of stagflation, the policy options are very limited. To avoid complicating the conditions, the Committee decided on the least risky option to hold.
The foreign exchange market framework, now ready, the MPC voted unanimously to adopt greater flexibility in exchange rate policy to restore the automatic adjustment properties of the exchange rate.
Consequently, all 9 members voted to hold and introduce greater flexibility in managing the foreign exchange rate.
The Bank would however, retain a small window for funding critical transactions.
Details of operation of the market would be released by the Bank at an appropriate time.
In summary, the MPC voted to:
(i)Retain the MPR at 12.00 per cent;
(ii) Retain the CRR at 22.50 per cent;
(iii) Retain the Liquidity Ratio at 30.00 per cent; and
(iv) Retain the Asymmetric Window at +200 and -500 basis points around the MPR 13
(v) Introduce greater flexibility in the inter-bank foreign exchange market structure and to retain a small window for critical transactions. - Copyright Holder: FILE REUTERS (CAN SELL)
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