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BDCs Critical to Exchange Rate Stability - - Khan

January 22, 2014

Babajide Komolafe

The bureaux de change subsector is critical to ongoing efforts to stabilise the exchange rate said Razia Khan of Standard Chartered Bank Group . Commenting on the increase in Cash Reserve Ratio (CRR) on public sector deposits to 75 per cent, Khan noted that the increase would enhance exchange rate stability, depending on the ability of the Central Bank of Nigeria (CBN) to influence BDCs. She said, "For now, the NGN should benefit from the withdrawal of further market liquidity in February. On the interbank market, we expect a modest pullback in dollar-naira exchange rates from the upper end of the plus/minus three per cent band around a mid-point of 155. The key though is the ability of the CBN to influence the BDC segment as well. Although this is a small proportion of the overall market, the CBN is nonetheless concerned about its influence on core inflation trends." While announcing the decision of the Monetary Policy Committee (MPC) to raise the CRR on public sector deposits, CBN Governor, Mallam Lamido Sanusi expressed concern over the widening gap between the official exchange rate and BDC rate, saying this could encourage malpractice in the foreign exchange market. He said, The Committee also expressed concern about the widening gap between the official and the BDC exchange rates, noting that this could precipitate speculation and round-tripping. Though, the BDCs represent a small component of the foreign exchange market, the widening spread appeared to have fed into creeping increases in core inflation. "The Committee noted with satisfaction that the year-on-year headline inflation remained within the indicative target range of 6-9% in the second half of 2013. However, the Committee noted the underlining pressure on core inflation, which may not be unconnected with the widening spread between official and BDC exchange rates. In order to head off the spectre of rising inflation in 2014, concrete actions will be needed to stabilize the currency and minimize the divergence between the two segments of the foreign exchange market." Consequently, the MPC decided to increase CRR on public sector funds to 75 per cent from 50 per cent, with the aim of further tightening money supply, to reduce inflationary pressure and sustain stability of the exchange rate. Commenting on the decision, khan, who is the regional head of research, Africa for standard Chartered Bank , said, "it is a clear demonstration of the CBN's continued commitment to fx stability, even in a more difficult environment. Should the Fx rate come under further pressure then more tightening cannot be ruled out. a further increase in the public sector CRR to 100 % cannot be ruled out. The gradualism in evidence now is most likely aimed at giving banks the opportunity to adjust to the tightening, especially those that remain overly reliant on public sector deposits. Whether we see any tightening beyond, this will depend very much on whether confidence in NGN stability can be restored with this move alone. oil earnings will be closely watched, as will FX reserves and the spread between interbank and BDC rates. "

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Source: AllAfrica

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