Faced with a double dilemma of an inflation uptick and weak growth, the Central Bank of Nigeria (CBN) on Tuesday kept benchmark rates unchanged as it continues to weigh out its previous policy measures to spur growth and rein in rising commodity prices.
Nigeria’s inflation rate marginally retreated for the first time in 19 months to 18.12 percent in April from 18.17 percent recorded in March 2021, according to the National Bureau of Statistics (NBS).
The 10 members present at the Monetary Policy Committee (MPC) meeting held Monday and Tuesday in Abuja voted to retain the Monetary Policy Rate (MPR) at 11.5 percent; Cash Reserve Ratio (CRR) at 27.5 percent; Liquidity Ratio at 30 percent, and asymmetric corridor of +100/-700 basis points around the MPR. This is the third straight policy rate hold this year.
CBN governor, Godwin Emefiele, who announced the decision of the MPC after their two-day meetings, raised concerns on the current stagflation dilemma, saying Nigeria’s current economic situation was “out of the ordinary.”
He said the GDP at currently 0.51 percent and far below 3 percent population growth was unacceptable, as he also raised concerns on heightening insecurity in the country.
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Nigeria’s Gross Domestic Product (GDP) recorded a growth of 0.51 percent year-on-year in real terms in the first quarter of 2021, compared to 0.11 percent in the fourth quarter of 2020, the NBS report indicated.
According to Emefiele, the CBN anticipates inflationary pressure to ease over time as authorities make effort to tackle insecurity, particularly within the food belt of the country where farmers can no longer access their farms.
“Committee members remain focus towards achieving price stability in the short to medium term. The committee note that economic growth could be hampered in an environment of unstable prices. To this end, the choice therefore was between loosening the stance of policy to ease credit further or tighten to moderate price development or maintain a hold stance in order to allow previous policy measures to continue to permeate the economy while observing global and domestic developments,” he said.
After its two-day meeting, the committee urged the CBN to consolidate on all administrative measures being addressed on inflation and spur output growth.
Such interventions, according to the committee, include consumption and investment as well as diversifying the base of the Nigerian economy through FX restriction for the importation of goods and food products that can be produced within.
The CBN governor, who said this while addressing the media after the meeting, said the committee also urged the bank to boost measures that can boost exportation.
Reacting to this decision, Bismarck Rewane, CEO, Financial Derivatives Company Limited, said, “It is a bit contradictory in the sense that we want to open up the economy, allow investments to come in and ratify the African free trade agreement; therefore, a restriction should be downplayed for now.”
But in the long run, he said, self-sufficiency is good. To get the recovery up and going, Nigeria needs to do two things, reduce the restrictions, fund the forex market aggressively and that way inflation comes down, he said.
“One other sector that I think is important in terms of employability is trade. Trade contracted, even though we opened our borders. Trading is a function of credit availability and liberalisation of the environment. But generally speaking, I think it was a good communiqué,” he said.
For Razia Khan, managing director, chief economist, Africa and Middle East Global Research, Standard Chartered Bank, the most important point to emerge from the CBN’s press conference was confirmation that the Investors and Exporters (I&E) rate was being used for official transactions. This is the rate now shown on the CBN website. “Nigeria has a managed float,” she said.
She said the CBN’s statements confirmed the effective harmonisation of the I&E and official FX rates, a key requirement for the unlocking of further donor financing (such as World Bank budget support). With the MPC having left all other parameters unchanged, it is not immediately clear if there are plans for even deeper FX market liberalisation, she said. Given concerns about still-elevated inflation, with insecurity driving food price inflation, perhaps not.
However, the fiscal benefits of now-confirmed official naira devaluation to levels of about N410 are clear. Not only does this provide a boost to oil-related earnings in local currency terms, but Nigeria’s efforts to borrow externally will also be more favourably received as a result.
“Nonetheless, with a smoothly functioning FX market still a key requirement for improved growth, the extent to which FX liquidity on the I&E window improves will be closely monitored. The greater transparency of this window, with trades being recorded on a Reuters platform, is at least a step in the right direction. However, more remains to be done,” Khan said.
