MPC may Retain Current MPR, Increase CRR on Public Funds • Analysts Fear Naira will Depreciate, Foreign Reserves Deplete in 2014

Having looked at possible developments in the economy and that of the external sector this year, economic analysts concluded that the Monetary Policy Committee (MPC) members will likely vote to maintain the Monetary Policy Rate (MPR) at the current level of 12 percent with the symmetric corridor of +/-2 percent, and also possibly increase the CRR on public sector deposits to 75 percent in order to effectively manage the liquidity in the inter-bank market in a cost effective approach at the end of its meeting.
Analysts at the FSDH Merchant Bank research department believe the Nigerian economy may not generate the required foreign exchange to continue to support the exchange rate around the current corridor of N155/$.
It recalled that the increased demand for foreign exchange last year was due to the possible unwinding of the QE in the U.S. and the need to repatriate funds by foreign investors in the face of competing alternative investments in the advanced economies with a more predictable risks outcome.
The external reserves position stood at about $43.61 billion as at end-December 2013 from a year high of $48.86 billion as at May 02, 2013. As at January 15, 2014 it stood at $43.26 billion. With the declining external reserves, possibility of a further unwinding of the QE in the U.S. and the low oil production, it may be challenging for the CBN to maintain the exchange rate around the corridor of N155/$. Thus, the MPC may adopt a more flexible exchange rate management regime.
The money market experienced high liquidity since the MPC meeting in November 2013 on account of the huge maturing bills and Asset Management Corporation of Nigeria (AMCON) Bonds. However, the impact of the Cash Reserve Ratio (CRR) debit in the system and the banks’ deposit mobilization drive for the end of the financial year purpose caused inter-bank rates to rise. The MPC will be faced with the difficult decision to choose a cost effective means of managing the liquidity in the system. The CBN may look beyond Open Market Operation (OMOs) to manage the liquidity. An additional increase in the CRR on public sector funds may be considered.
The value of the Naira remained relatively stable in 2013, appreciating marginally by 0.04 percent at the official market to close the year at N155.75/$. The CBN adopted a managed-float strategy in the determination of the value of the Naira in Nigeria in 2013 just like the previous years.
On account of the exchange rate management strategy adopted by the CBN, the market forces had little impact on the direction of the value of the Naira at the official market. The available data shows that the CBN used the country’s external reserve to meet the growing sales of foreign exchange at both the Wholesale Dutch Auction System (WDAS) and Retail Dutch Auction System (RDAS) in order to keep the exchange rate stable. However, the value of the Naira remained volatile at the inter-bank market in 2013. The market forces had more influence in the determination of the foreign exchange rate at the inter-bank market than at the official market. The value of the Naira closed the year 2013 at N160.05/$ at the inter-bank market, leading to a depreciation of about 2.45 percent in 2013. The highest rate recorded in 2013 in this segment of the market is N164.06/$ recorded in September 06, 2013 while the lowest value was N156.10/US$1 recorded on January 10, 2013. The CBN also intervened in this segment of the market to reduce the speculative demand by the authorised dealers. However, we do not expect the CBN to defend the value of the Naira at any cost, thus we may see a more flexible exchange rate regime in the short-to-medium term, which will cause the value of the Naira to depreciate at the official market.

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