Nigeria Moves to Clean Illicit FX Markets as MPC Holds Key Rates
Nigeria moves to clean up illicit foreign exchange markets as the Central Bank’s Monetary Policy Committee (MPC) holds key benchmark interest rates and derecognised other foreign exchange markets.
MPC retains key benchmark rates on Friday after a two-day meeting as the apex bank revealed plans to go after illegal foreign exchange dealers amidst dollar scarcity. At the just concluded policy meeting, economic growth, inflation and FX top discussion with a number of policy measure development targeted at cleaning up illegal foreign currencies dealers, including putting AbokiFX under scrutiny.
MPC members unanimously voted to retain all policy parameters to allow deployed measures to continue to support growth, which it projects at 2.86% year on year for 2021, few basis points below the Federal Government target of 3.00%.
The monetary policy rate remains at 11.5%, the cash reserve requirement at 27.5%, the Liquidity ratio at 30% with the asymmetric corridor around the MPR at +100/-700 basis points. Other considerations at the meeting include plans to put measures in place to limit the potential impact of normalisation of global monetary policy on the domestic economy, says CardinalStone Partners in a note.
Similarly, the policy committee hammered strongly over its plans to curb fraudulent FX demand and ensure a properly functioning structure for the FX market. The apex bank restated commitment toward the launch of e-Naira on October 1, 2021. This comes in addition to the commencement of Infraco, which is targeted at closing infrastructure deficits.
According to the MPC, Nigeria’s only recognised rate is quoted at its investors and exporters window, where legitimate FX demands are met. Against previous practice, before it pull the plug on the weekly dollar supply, the monetary authority said selling FX from the reserves to bureau de change operators is not a global best practice.
Thus, the Godwin Emefiele-led central bank policy committee emphasised that the decision to stop sales to the sector would not be reversed. Recalled, in 2016, following the oil shock which impacted government revenue and dollar inflow, the apex bank had cutoff bureau de change from FX chain but later reversed the position.
In the latest development at the policy meeting, the CBN disclosed that it will go after illegal currency dealers, including individuals who illicitly obtain dollars from banks in the guise of having business and personal travelling allowance-related needs.
The apex bank is also investigating AbokiFX, its owner, and complicit companies for allegedly participating in FX manipulation, illegal fixing of exchange rate rates, and economic sabotage.
Reacting to the development, experts at Cardinalstone Partners said while they expect the outcome of the meeting to drive some cautiousness in the FX market, a lot more will have to be done to curtail the widening premium over Investors and Exporters Window driven by speculation in the parallel market.
The investment firm also noted the need for increased FX supply to clear existing backlogs of dollar demand and restore relative calm in the market.
On the consumer price index, the Committee expressed delight at the continued moderation in the headline inflation for the fifth consecutive month to 17.01% year on year in August from 17.38% in July, supported largely by the marginal decline in the food component from 21.03% in July to 20.30% in August.
However, MPC noted that the inflation rate remains well above the CBN’s corridor of 6.00% to 9.00%, indicating that the objective of price stability remains far off. Nonetheless, the Committee expressed optimism that an increase in food production underpinned by the sustained intervention by the bank will help in moderating the headline inflation.
The meeting urged the fiscal authorities to build on earlier efforts to articulate a clear strategy to attract private sector involvement while improving critical infrastructure to improve the ease of doing business.
“Barring no significant shock to prices, we expect the base effect from the prior year to continue to slow down inflationary pressure over the rest of the year”, Cordros Capital said.
Today, the Nigerian local currency dipped big against major currencies including the dollar at the parallel market. Naira was exchanged at N572 to a dollar at the parallel market, British Pounds was sold for N778 and Euro was exchanged for N602. Trading at the official Investors and Exporters window saw the Naira closing at N412.88 to the dollar on Friday with a similar pattern across other major currencies.
In July, the CBN ends dollar sales to the Bureau De Change sector of the market, citing regulatory infractions by some of the members of the currency traders. However, the impact of the ban is far from strengthening the naira against the dollar.
Read Also: Monetary Policy Committee Holds Benchmark Interest Rate at 11.5%
Nigeria Moves to Clean Illicit FX Markets as MPC Holds Key Rates
