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Nigeria: Buhari Blinks

Was it the wholly unexpected Q1 GDP contraction and imminent recession that sealed the deal? The accelerating depletion of FX reserves to a 10-year low? Inflation jumping to a 6-year high of 13.7%? The 6% slide in the NSE so far this year? The rising perception that the current FX stance, alongside the stumbling oil price and sharp drop in hydrocarbon production, was causing possibly irreparable economic damage? In any case, President Buhari has clearly agreed to look the other way while the MPC acts to square the circles. Exactly "what" and "how" should emerge "at an appropriate time".

In a nutshell, the third meeting of the MPC during 2016 resulted in a unanimous decision to relax the Naira's 197-199 peg to the USD and FX illiquidity more generally. Instead of a full declaration of the policy retreat, which would have probably been a step too far for an ex-military man, the Committee will announce the details of the more "flexible" regime over the next few days. Nonetheless, it is likely to involve a dual-rate model framework where the Naira falls to a more market-oriented level while USD restrictions are eased for critical imports such as machinery parts and fertilisers that help can help hasten the structural transformation and diversification required. At least that is how the policy will be sold.

No less important was the fact that the Committee decided to leave all its policy rates unchanged when further tightening was expected. Given the imminent inflationary impact of Naira slippage, which was evidently the President’s main concern, this might suggest that the focus has shifted towards supporting economic activity (hold or loosen monetary policy) rather than containing inflation (tighten policy). However, it may well be that the Committee have reasoned that while the immediate pass-through dynamics may be firm, negative base effects should see inflation start to decline by early 2017.

That’s the theory anyway.

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