‘Forex policy tweak may hold key to economic growth’ - NEW TELEGRAPH

AUGUST 13, 2019


To be successful in speeding up the country’s economic growth, the Central Bank of Nigeria (CBN) may need to tweak its foreign exchange policy to attract foreign investors, analysts at CardinalStone Research have suggested.

The analysts, who stated this in a report entitled, “H2 2019 Outlook: Fish or cut bait,” obtained by New Telegraph at the weekend,  argued  that even as the  CBN stepped up the implementation of  pro-growth administrative measures, it  would  have to take another look at its forex policy  to attract the much needed Foreign Direct Investment (FDI).


The analysts stated: “In Nigeria, monetary policy direction remains largely unclear, with the monetary authorities leaving all its policy parameters unchanged in its late July meeting on the one hand, while implementing pro-growth administrative policies such as the increase in loan to deposit ratio requirement and reduction of the maximum amount banks can place on the Standing Deposit Facility (SDF) on the other. We believe the decision on the handling of currency remains the most crucial going forward.



“The Central Bank of Nigeria (CBN), through its monetary policy committee, appears to have re-affirmed a willingness to continue its ‘currency protectionism’, mostly by drawing down on reserves to offset occasional shocks when necessary. Unfortunately, this strategy has failed to attract the needed patient capital into the country in the last five years mostly due to CBN’s stronghold on currency. For context, volatile foreign portfolio flows into Open market operation (OMO) bills now constitute c.27.0% of Nigeria’s reserves, according to IMF. Clearly, interest rate spreads over key benchmarks will be the key motivator for this class of investors to roll over their investments in OMO bills.”

Indeed, according to the analysts, a “currency regime shakeup” could be the key to reviving the country’s stock market which has been on a downward trend in recent times.

They said: “Despite attractive valuations, a reversal of fortunes for equities is likely to depend on a decisive policy tweak to the currency regime. Since 2017, investors have priced in a forward premium over spot rates in the naira forward market (currently 1Y forward priced at 400.0/$), indicating expectations of imminent naira devaluation. Until this dark cloud is erased, we see little or no legroom for significant equity market correction in the near-term.”

The naira has come under pressure at the Investors and Exporters’ (I&E) forex window in recent weeks as foreign investors booked profits from local bonds after yields fell on the debt market.

Last Wednesday, for instance, the CBN held a surprise Treasury Bills auction, during which it sold a total of N114.6 billion worth of the bills. Traders said the move was part of efforts by the Apex Bank to boost dollar liquidity in the currency market after the naira fell.


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