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Reducing MPR May Put Pressure on Naira, Expert Warns

22 Feb 2013

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Obinna Chima
 

Just as the House of Representatives and some interest groups in the country continued to agitate for a reduction in the Monetary Policy Rate (MPR), the Africa Economist/Managing Director, Economic and Market Analysis, Citibank, Mr. David Cowan, has advised the Central Bank of Nigeria (CBN) to be careful in lowering interest rate.

According to Cowan, sending a signal that the restrictive monetary policy regime was over may put pressure on the naira.

Cowan said this while making a presentation at the fourth Eurofinance conference tagged: “Treasury, Risk and Cash Management in West Africa,” held in Lagos Thursday.

The CBN’s Monetary Policy Committee (MPC) which determines interest rate has in the past one year, kept the MPR at 12 per cent, which some analysts, manufacturers and industrialists believed was not favourable to them.

Also the cash reserve requirement (CRR) and the liquidity ratio are currently at 12 per cent and 30 per cent respectively. The naira has been very stable in the past 18 months, just as Nigeria’s external reserves has been upbeat.

But Cowan pointed out that having attracted a lot of inflow into the country as a result of its tight monetary policy stance, the central bank must be careful in in relaxing interest rate so as not to hurt the economy.

He explained: “The problem is that when you increase interest rate and it attracts inflow. But when you want to ease rate, it is quite problematic.
Nigeria’s high interest rate has attracted a large amount of inflow into the country and those funds may want to leave at some point.

“How you manage that without putting your currency under pressure is what is complicated. But in the Nigerian context, the central bank has built up reserves to control that, if it is going to happen.

“There is one lesson Africa interestingly learnt last year about its currencies. If an African government wants to keep its currency stable, it really jerks up interest rate because in the global economy, high interest rate will attract more foreign inflows and allows currency stability.”

He argued that the Nigerian financial market had recorded over $5 billion inflow since last year, saying that the figure might increase to about $10 billion by the end of the year.

Cowan who predicted that the naira is going to be stable this year, also argued that the local currency may come under pressure next year.
“By the time we get to 2014, which is a pre-election year, the fiscal consolidation which has been achieved is going to come under some pressure. I think we might see some changes in the management of the central bank which I think may stall some confidence in the system.

“If you look at Nigeria’s growth story, what you see is that oil production is stagnated, but the rest of the economy has been growing quite faster. What that does is that it drives the increase demand for forex,” he said.

He disclosed that a lot of economies across the globe were going through economic re-balancing.

According to Cowan, lots of projections that the United States would become a net oil exporter by next decade, there would be a fundamental change in supply and demand in the international oil market.

Tags: Business, Nigeria, Featured, MPR, Naira

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