Electioneering, Security Spendings, Oil Theft Remain Danger to CBN’s Objective

Central Bank of Nigeria (CBN)’s objective of keeping inflation rate below 10 percent, maintaining naira stability is being threatened with increasing electioneering and security spendings, as well as lose moneys drifting in as proceeds from stolen crude oil.
“Other factors such as sustained pressure on the naira, continuous pipeline vandalism, oil theft and oil price shocks are threats to external re- serves accretion and government revenue. These factors could lead to a spike in inflation”, warned Bismark Rewane, chief executive officer of Financial Derivatives Company (FDC) Limited.
Razia Khan, analyst with Standard Chartered Bank, London in her reaction sent to BusinessSense appear to share Rewane’s fears. 
She notes that substantial part of the pressure on foreign exchange is not necessarily import related. The implication could be politician seeking foreign exchange to oil their political machines.
Analyst say this old be a smart way of spending huge money in a compatible way.
“First, the commitment to foreign exchange stability to anchor inflation expectations remains in place.  The CBN remains committed to support the currency, and while the MPC has noted the pressure on foreign exchange reserves, it also noted a rising level of ‘non-import related’ demand for foreign exchange. The weeks ahead, and the performance of the currency will likely determine what happens next”, she said.
The Central Bank of Nigeria keeps its Monetary Policy Rate (MPR) on hold at 12 percent, and keeps the Cash Reserve Ration (CRR) unchanged as expected.  Ahead of the meeting, the key point of interest was foreign policy.  While little was unveiled at this meeting in terms of new initiatives, CBN comments will nonetheless provide reassurance.   
 Khan is however optimistic that past tightening – the hike to 50 percent on the CRR on public sector deposits – will help to some extent.  
“But should the pressures on the foreign exchange rate prove excessive, we may yet see other measures aimed at stabilising the foreign exchange rate.  For Nigeria, the question is about sustainability of this foreign exchange policy, given pressures on oil output and the country’s political cycle.  Tight policy helps to deliver near-term foreign exchange stability of course, but real economy fundamentals will matter more beyond the very near-term”, she said.
Rewane said, the decision to leave rates unchanged is considered to be a defensive and strategic move. 
This, he said is because the difference between the inflation rate and the benchmark rate in Nigeria (i.e. real rate of return) has widened to 3.8 percent from three percent in January. Also, GDP growth declined to 6.18 percent in second quarter. 
“Under normal circumstances, the above scenario is a justification for a cut in rates, however, the risk of excessive fiscal spending due to the run up of the 2015 election persists”.

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