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Continue money supply tightening for next 24 months, Moghalu tells CBN

The Africa we want: Full speech of Professor Kingsley Moghalu at the AfCFTA Joint Private Sector Session

The Central Bank of Nigeria (CBN) should continue its recently announced monetary policy stance of tightening the money supply for the next 24 months at least until inflation is brought under firm control in the single digits, Kingsley Moghalu, Chairman, advisory board and board of directors, Africa Private Sector Summit (APSS), advised.

He gave the advice in his keynote speech titled ‘Nigeria’s Distressed Economy: Which Way Forward?’ at the Leadership Newspaper Group 2024 conference and awards in Abuja.

A recent analysis by BusinessDay reveals that under the leadership of Governor Olayemi Cardoso, the Central Bank of Nigeria has issued a substantial amount of N1.5 trillion in Open Market Operation (OMO) bills.

Most of these bids were for long-tenured bills with maturities ranging from 180 to 365 days. Despite six auctions held during Cardoso’s tenure, the total sum of N1.5 trillion was achieved in only five auctions. The auction held on December 22, 2023, saw no sales due to investors bidding excessively high, according to sources familiar with the matter.

In his address, Moghalu offered insights into the country’s economic woes and proposed strategies for navigating through the challenges.

Moghalu’s speech addressed the recent rate hike by the Central Bank, which saw a dramatic increase of 400 basis points (4%). While acknowledging criticisms of the hike, Moghalu emphasized the importance of considering the broader economic context. He highlighted that Nigeria’s hyper-inflation is primarily cost-push in nature, attributing much of it to forex instability.

According to Moghalu, the abundance of Naira in loose monetary conditions exacerbates demand pressure on foreign currencies, particularly the US dollar, fueling capital flight and contributing to a vicious cycle of inflation. He argued that addressing forex instability is crucial for achieving both price stability and exchange rate stability in the medium term. Additionally, he emphasized the importance of investor confidence, stressing that attractive yields are necessary to attract portfolio investments and stabilize the exchange rate.

The former Central Bank’s deputy governor also cautioned against the potential repercussions of high interest rates on financial stability. He warned that businesses may struggle to repay loans, leading to an increase in non-performing loan rates. Moghalu urged the CBN to proactively manage the implications of its monetary policy stance, particularly in the banking sector.

While acknowledging the short to medium-term focus of the CBN’s actions, Moghalu called for a longer-term perspective to address systemic issues effectively. He emphasized the need for a multidimensional approach, encompassing fiscal management reforms to strengthen Nigeria’s financial sector resilience.

Moghalu’s keynote speech shed light on the complexities of Nigeria’s economic challenges and proposed strategies for charting a way forward. As stakeholders grapple with the country’s economic woes, the insights offered by Moghalu underscore the importance of holistic and forward-thinking approaches to address the root causes of Nigeria’s distressed economy.

Money supply, known as M2, increased by 48.25 percent year-on-year to N78.32 trillion as of December 2023 from N52.83 trillion in the same year, according to the Central Bank of Nigeria (CBN).

Money supply refers to the total amount of money circulating in an economy. It includes physical currency (like coins and banknotes) and various types of deposits in banks that can be quickly converted to cash.

Economists often categorize money supply into different measures, typically M0, M1, M2, and M3, each representing a broader definition of money with varying levels of liquidity. These measures help in understanding the overall availability of money in an economy.