• Thursday, March 28, 2024
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Nigeria’s central bank optimistic of economic recovery in Q4, but analysts disagree

Nigeria’s opaque external reserves drains confidence in FX reform

Nigeria’s central bank on Tuesday sounded optimistic that the economy, which is currently in recession, would recover by the end of 2020, predicting that Q4 2020 GDP growth would likely improve, while inflation is projected to moderate by the end of the first quarter of 2021.

Godwin Emefiele, Central Bank of Nigeria (CBN) governor, expressed the optimism while announcing the decision of the Monetary Policy Committee (MPC) after its two-day meeting in Abuja.

The MPC retained the benchmark interest rate at 11.5 percent, Cash Reserve Ratio (CRR) at 27.5 percent, liquidity ratio at 30 percent, and the asymmetric corridor around the monetary policy rate at +100 bps/ -700bps.

But analysts in the financial services sector do not share in the CBN’s optimism.

“They are very optimistic that inflation will moderate in 2021 because of the harvest. I do not think that will happen,” Bismarck Rewane, CEO, Financial Derivatives Company, said.

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“I think that the impact of the pass-through effect of exchange rate scarcity will also hold inflation. So, we see inflation going to 16 percent, and that will make interest rate to change its position at the next meeting,” he said.

Rewane said the coordination between fiscal and monetary policy to accomplish what is set out is quite interesting but reckons that both the fiscal and monetary authorities are too optimistic about the outcomes.

“I think that, yes, we will recover in 2021, but it is extremely optimistic to think that by next month, and don’t forget that quarter you had the #EndSARS. To me, recovery will take slightly longer,” he said.

Nnamdi Nwizu, co-managing partner, Comercio Partners, reckoned that the economy managers “are optimists”, but said the big chunk of the work would lie much on the fiscal side.

“I think the monetary policy side is almost at its end. It is too optimistic to expect that everything will disappear by next month. We need to see what actions they will take and when budget will get approved to see how things will pan out starting from next year,” he said.

On the MPC decision, Razia Khan, managing director, chief economist, Africa and Middle East Global Research, Standard Chartered Bank, said there was little surprise in the decision to keep all parameters on hold “given the recent acceleration in inflation”.

The CBN still attributes the rising inflation to non-demand factors and expects some improvement in food prices with the harvest, and better security, she said.

“Of greatest relevance for markets – not only was there little adjustment in monetary policy parameters that might lift market interest rates from current low levels, but the CBN reiterated its commitment to FX stability, as other reforms in fuel pricing and the power sector proceed,” Khan said.

“The overall read on this supports our view that we should expect little in the way of any devaluation intent on Nigeria’s official FX markets in the near-term,” she said.

Committee’s considerations remain focused around tailwinds impacting upward pressure to domestic prices and key headwinds to output growth. The committee noted that inflation continued to be driven by supply-side disruptions arising from Covid-19 pandemic and other legacy factors. Key among these are security challenges in some parts of the country, increase in food prices and recent hike in pump price of petrol and electricity tariff.

“Most of us did not really except any action from the MPC. Secondly, it was instructive to note that Emefiele totally seemed to ignore the FX crisis in the parallel market that we are facing. No measure was said on how they are going to stem that pressure,” Nwizu said.

“For inflation, he talked about structural issues, logistics, supply chain issue, power and Covid-19 pandemic. I would have expected that they talked about the currency, because it is a big issue,” he said.

Emefiele noted that total gross credit to the economy stood at N19.54 trillion as of November 13, 2020.

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Responding, Rewane said, “N19 trillion as a percentage of total GDP of N155 trillion is not going to have an impact significantly on GDP and output growth. Nominally, it is okay but in terms of impact, it is not going to change the outcome.”