July 28, 2021/CSL Research

As expected, the Monetary Policy Committee (MPC) at the end of yesterday’s meeting, unanimously elected to:

• Retain the Monetary Policy Rate (MPR) at 11.5%.
• Retain the Asymmetric corridor around the MPR at +100/-700bps.
• Retain the Cash Reserve Ratio (CRR) at 27.5% and
• Retain the Liquidity Ratio (LR) at 30.0%.
  In our view, the decision seems reasonable, as hiking rates, in recognition of increased upside risk to prices and mounting external sector pressures would further constrain economic growth, while a rate cut is likely to intensify inflationary pressures and amplify the currency risk. 

  Halt of FX sales to BDC operators  

  In reaction to evidences of illicit financial behaviour of Bureau De Change (BDC) operators, the CBN reached the following decisions.

• To discontinue the sales of FX to the BDC operators
• The quantum of FX previously sold to BDCs will be redirected to commercial banks for invisible trades.
• Commercial banks are to create dedicated teller stands to sell FX to customers with complete and valid documents.
• The CBN will no longer process new and in-process BDC licences.
  While the move was unanticipated, it mirrors a similar action taken by the CBN at the heat of the FX crisis in 2016. The action then yielded minimal results, as the parallel market premium was estimated at 61% by year-end. The standard regulatory procedure for all BDCs is to sell FX to clients who need US$5000 or below, at a N2 margin per dollar supplied by the CBN. The decision of the CBN seems justified, as there have been some speculations that BDC operators earn profits above the regulatory benchmark. In our view, the action of the CBN reflects the unabated pressure on NGN, as the average parallel market premium is still elevated at 22%. Beyond this, the CBN’s drive towards currency unification, alongside higher oil prices, is yet to translate to tangible currency gains, with complaints of FX shortages persisting. 

  While we understand that the aim of the policy may be to trail all FX claims within the market, this is unlikely to improve the FX liquidity and curb elevated demand. For clarity, our views are anchored on the following: (1) the current CBN’s FX supply to the BDCs is estimated at an average of US$443.4 million per month, this is 2.0x lower than the 2-year average demand from BDCs. (2) Corporates and individuals who import any of the items restricted by the CBN will continue to source FX from the black market, (3) BDCs will likely halt FX sales till there is clarity on the next line of action from the CBN and (4) getting dollars from banks may not be easy as getting from BDCs. As such, our base case expectation is for the parallel market premium to widen as a reaction to this announcement, save for a reversal of the ban or increased FX supply by the CBN (which may be difficult) due to the pressured reserve.

  Despite the NGN remaining overvalued, we think that the I&E window rate (benchmark currency) will remain relatively stable, supported by the recent tightened spread in Naira valuation. Overall, FX outlook for the rest of the year will largely depend on (1) expected inflows from likely Eurobond issuance, (2) improvement in current account deficit position (CSL’s forecast: 1.2% of GDP in 2021) and (3) continued recovery in crude oil prices.

  MPR Outlook

  We envisage the committee’s stance could become hawkish in the year’s ultimate meeting (in favour of exchange rate stability) if the trend in the global economy continues to foster economic wins for Nigeria.