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ARM: CBN torn between stimulating growth & maintaining FX stability
ARM Securities says the Central Bank of Nigeria will be torn between stimulating growth and maintaining forex stability as the Apex Bank holds its second Monetary Policy meeting for the year. Olamide Adeboboye, Research Analyst at ARM Securities joins CNBC Africa for more.
Mon, 23 Mar 2020 14:19:34 GMT
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AI Generated Summary
- The global economic environment is turbulent, with markets experiencing sell-offs and foreign investors seeking safe havens.
- The CBN faces challenges in supporting the economy while maintaining exchange rate stability amidst significant outflows and market uncertainties.
- Collaboration between fiscal and monetary authorities is crucial in navigating the economic challenges posed by the pandemic and ensuring sustainable growth.
As the Central Bank of Nigeria (CBN) holds its second Monetary Policy Committee (MPC) meeting of the year, all eyes are on the decisions that will be made regarding forex policies and interest rates. Olamide Adeboboye, a Research Analyst at ARM Securities, shared insights on the challenges faced by the CBN amidst the current global economic turmoil. The global environment has been turbulent, with markets experiencing sell-offs and foreign investors seeking safe havens such as US Treasuries. Even the US government has had to inject trillions of dollars into the economy to support businesses during these trying times. In Nigeria, the FX market has seen a net outflow of about $1.7 to $1.8 billion in just the first two weeks of March. The CBN has had to intervene in the markets and adjust rates in response to the economic situation. Equity markets are down, and foreign investors are wary of taking risks due to the ongoing pandemic. Developed economies are also struggling to contain the economic fallout, adding to the complexity of the situation faced by the CBN. To support the economy, the Nigerian government has announced various policies, including a 50 billion naira package to support businesses, particularly in sectors like pharmaceuticals and manufacturing. The CBN is tasked with balancing the need to stimulate the economy while also maintaining exchange rate stability. This presents a challenge as releasing liquidity into the economy could lead to inflation and depreciation of the Naira. The CBN has already cut the MPR by 500 basis points in January, and further adjustments may be on the horizon. The market is eager to hear about potential changes in interest rates and forex policies to address the current economic challenges. One key concern is inflationary expectations and the possibility of interest rate adjustments. The CBN may opt to cut the MPR to support growth, aligning with other economies that have taken similar measures. However, foreign portfolio investors prioritize the return of capital over the return on capital, making it difficult to attract them back to the market. Increasing OMO rates and adjusting the Naira pricing may help maintain some level of appeal to foreign investors. Collaboration between fiscal and monetary authorities is crucial to navigating the economic challenges posed by the pandemic. Both sides must work together to protect the economy from the severe impact of the virus and ensure growth prospects are sustained. The coordination between fiscal and monetary policies, akin to the approach taken by the US government, is essential in safeguarding the economy and mitigating the risks posed by the current global crisis.
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