Pain today, gain tomorrow

FDC Economic Bulletin

Financial Derivatives Company Ltd.

: 01-7739889 www.fdcng.com

September 22, 2015

As widely anticipated the MPC tweaked the CRR from 31% of total deposit liabilities to 25%, ostensibly

to inject liquidity into what is essentially a fragile but nervous money market in Nigeria. It left all other

ratios unchanged and essentially kicked the can down the road, borrowing a leaf from the U.S. Fed even

though in totally different circumstances.

What did the MPC do?

Reduced the CRR by 600 basis points to 25%. The rate was as low as 12% about 2 years ago. What a

difference 2 years can make. At that time, Nigeria’s external reserves were approximately $47 billion,

oil was trading at $108 pb and the naira exchange rate was $/156 at the official market and $/164 at

the parallel market. Ever since then, the CRR has had a chequered movement spiking to as high as

75% for public sector deposits. This strategy is based on the assumption that banking system is partly

responsible for the speculative demand and attack on the naira. The policy makers are under the

erroneous impression that administrative measures can effectively combat demand for dollars. The

marginal propensity to import has been estimated at 0.63 and is sticky downwards.

Source : CBN

Chart 1: CRR since July 2013

12% 12% 15%

20%

31%

25%

50%

75% 75% 75%

31%

25%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

Jul-13 Jan-14 Mar-14 Nov-14 May-15 Sep-15

Private sector Public sector

Monetary policy rate (MPR) was retained at 13% p.a.

Liquidity ratio was retained at 30%

The symmetric corridor of +/- 200 basis points around the MPR was retained

Net open foreign exchange trading position was retained at 1%

Implications

The implementation of the TSA has resulted in a net outflow of approximately N250 billion. With a 6%

reduction in CRR, approximately in excess of N700 billion will be injected into the system given that a 1%

reduction in CRR results in an injection of approximately N130 billion into the system. Thus, the net

increase in liquidity will be about N530 billion. Since money supply has decreased both monthly and

annually, we expect inflationary pressures that may result from this CRR reduction to be muted.

Outlook

The issue of the fair value of the naira at the forex market was carefully avoided. President Buhari had

earlier suggested that the naira was in his judgment fairly priced. He however affirmed that the CBN was

making forex available for all necessities. By continuing to manage the exchange rate through several

administrative measures, the CBN is bearing the pain today for tomorrow’s gain. However, what the CBN

cannot control is the price of oil. The CBN has left the window open and is likely to review its position on

currency devaluation depending on what happens to the price of oil. If it stays below $50 pb, then an

adjustment is inevitable.

F D C E co n o m ic B ul l e t i n P age 3

Financial Derivatives Company Ltd.

: 01-7739889 www.fdcng.com

Source : CBN

Chart 2: Exchange Rate (Naira to US$1)

African Context: Is Nigeria an outlier?

Most SSA countries recently maintained their monetary policy stance, except for Ghana, which increased its

MPR to 25%. This is due to inflationary pressure and a depreciating currency in Ghana. The cedi has

depreciated by 20.12% YTD, while inflation declined from 17.9% in August to 17.3% in June. South Africa is

holding its MPC meeting on September 23. It is expected that the South African MPC will leave interest rates

unchanged.

Angola, another oil producing country, has devalued the kwanza 3 times in the last few months, the

cumulative depreciation is 19%. This was after the futility of administrative controls. Angola has also

eliminated subsidies on refined petroleum products. Angola’s external reserves are $24.52 billion. Angola’s

crude oil production was 1.7 mbpd in August compared to Nigeria’s 1.9mbpd.

F D C E co n o m ic B ul l e t i n P age 5

Financial Derivatives Company Ltd.

: 01-7739889 www.fdcng.com

Important Notice

This document is issued by Financial Derivatives Company. It is for information purposes only. It does not constitute any offer, recommendation or

solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of

likely future movements in rates or prices or any representation that any such future movements will not exceed those shown in any illustration. All

rates and figures appearing are for illustrative purposes. You are advised to make your own independent judgment with respect to any matter con-

tained herein.

NIGERIA

Oil Production 1.9 mbpd

Population c. 180 million

External Reserves $30.6 billion

External Reserves per capita $171.9

Cumulative currency devaluation 26%

ANGOLA

Oil Production 1.7 mbpd

Population c. 22.4 million

External Reserves $24.5 billion

External Reserves per capita $991.1

Cumulative currency devaluation 19%