How will Nigeria’s MPC respond to COVID-19?

In the midst of the global health and economic crisis brought about by the COVID-19 pandemic, Nigeria's Central Bank has taken significant steps to stabilize the economy. The recent adjustments made by the Central Bank of Nigeria (CBN) in the foreign exchange (FX) rate and official Naira peg have sparked discussions about the country's currency value and market attractiveness. Dipo Ajayi, the Head of Fixed Income and Forex at Chapel Hill Denham, shed light on the technicalities and market implications of these moves in a recent interview with CNBC Africa. Currency devaluation has been a topic of debate as the Naira has faced pressure due to falling oil prices and dwindling foreign reserves. Ajayi pointed out that despite the CBN's reluctance to devalue the currency previously, the recent adjustments signal a shift in approach. The aim is to make the market more attractive to foreign investors and align with market expectations. However, there are calls for further re-adjustment of the Nigerian currency as economic realities dictate a possible need for a higher valuation. The convergence of exchange rates, a long-standing issue in Nigeria, has been addressed by the CBN through recent measures. Ajayi praised this move, noting that it will help eliminate disparities in different FX windows and potentially boost market confidence. In light of the current global economic uncertainty, attracting investments into Nigeria is crucial. The country's heavy reliance on oil revenue poses a challenge, especially with the drastic drop in oil prices. Ajayi emphasized the need for a competitive exchange rate to entice foreign investors. Despite the CBN's efforts to stabilize the market, concerns remain about the overall investment climate. With fixed-income instruments offering low returns and uncertainties in the equity market, foreign investors are cautious. The lack of attractive yields coupled with market risks hinders immediate investments. Ajayi highlighted the importance of balancing returns and risks to encourage market participation. The liquidity situation in the market has also been affected by the CBN's policies. Low interest rates have limited investment options, leading to liquidity constraints. Until interest rates reach a more favorable level, investors may remain hesitant to fully engage with the market. The CBN's Monetary Policy Committee (MPC) faces tough decisions amid calls for rate adjustments to spur economic growth and support micro, small, and medium enterprises (MSMEs). As Nigeria's MPC convenes for a two-day meeting, expectations are high regarding potential policy shifts. While there are calls for rate cuts to stimulate economic activity, the committee must balance inflation concerns and growth objectives. Ajayi anticipates a modest rate adjustment of 50 to 100 basis points to support the economy. The outcome of the MPC meeting will provide insights into the CBN's stance on navigating the current economic challenges in Nigeria.