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CBN Gov warns of ‘imminent’ recession, unfolds flexible forex regime

Governor of Central Bank of Nigeria (CBN), Godwin Emefiele, on Tuesday said the country is headed into an imminent recession, as the economy grew in the negative by 0.36 per cent in the first quarter of 2016. Emefiele, who spoke at the end of the bank’s 250th Monetary Policy Committee (MPC) Meeting in Abuja, also announced that the CBN would partially loosen the Naira peg to the US Dollar, by adopting a flexible foreign exchange rate regime.

He said the Monetry Policy Committee of the Central Bank of Nigeria took the decision to save the economy from impending collapsed due to the acute shortage of foreign exchange and other economic uncertainties The flexible foreign exchange rate regime is being adopted to maintain stability in the economy and stave off imminent recession against a backdrop of challenging global and domestic economic and financial conditions. The apex bank governor, in a policy U-turn designed to boost exports and stave off a recession in the country, said government must take very urgent measures to avert the likelihood of the economy going into recession.

He, however, noted that efficient implementation of the recently passed 2016 federal budget, especially the capital expenditure portion, would help invigorate growth in the economy as business confidence rejuvenates. The MPC retained the MPR at 12.00 per cent; retained the CRR at 22.50 per cent; retained the Liquidity Ratio at 30.00 per cent; and retained the Asymmetric Window at +200 and -500 basis points around the MPR. It also introduced greater flexibility in the inter-bank foreign exchange market structure and retained a small window for critical transactions. “The Committee acknowledged the severely weakened macroeconomic environment, as reflected particularly in increased inflationary pressure, contraction in real output and rising unemployment.

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,” he explained. He added that “The actions, however, proved insufficient to fully avert the impending economic contraction. With some of the conditions that led to the contraction in Q1, 2016 still largely unresolved, the weak outlook for growth which was signaled in July 2015 could extend to Q2.

“To this effect, today’s policy actions have to be predicated on a less optimistic outlook for the economy in the short term, given that, even after the delayed budgetary passage in May 2016, the initial monetary injection approved by the Federal Government may not impact the economy soon, as the processes involved in MDAs finalizing procurement contracts before the disbursement of funds may further delay the much needed financial stimulus to restart growth.” According to Emefiele, the average naira exchange rate remained stable at the interbank segment of the foreign exchange market during the review period. “The exchange rate at the interbank market opened at N197.00/US$ and closed at N197.00/US$, with a daily average of N197/US$ between March 25 and May 13, 2016. The Committee, therefore, remains committed to its mandate of maintaining a stable naira exchange rate.

The MPC noted the level of activity in the autonomous foreign exchange market especially, following the deregulation of the downstream petroleum sector with attendant increased demand in the interbank market, thus further exerting pressure on the naira.” “The Committee recalls that over the last two consecutive meetings, it had signaled the imperative of reform of the foreign exchange market. In the intervening period, the Committee interrogated the issues around the current foreign exchange market regime, tracing them to the low foreign exchange earnings of the economy.

Consequently, in the Committee’s opinion, the key issue remains how to increase the supply of foreign exchange to the economy.” The Committee observed that while the Bank has been working on a menu of options to ensure increased supply of foreign exchange, there was no easy and quick fix to the foreign exchange scarcity problem as supply remained essentially a function of exports and the investment climate.

He explained that the Committee was aware that a dynamic foreign exchange management framework that guarantees flexibility could not replace the imperative for the economy to increase its stock of foreign exchange through enhanced export earnings, stating that such a structure must evolve to provide basis for radically improved investment climate to attract new investments. The bank has previously kept a de facto peg of around 197 naira per dollar but that has become unsustainable due to a shortage of hard currency stemming from a slump in oil revenues. The naira, on the parallel market has fallen to some 40 percent below the official rate.

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