MPC Experts See No Scope for Easing as Nigeria Stuck in Stagflation
Godwin Emefiele, CBN Chief

MPC: Experts See No Scope for Easing as Nigeria Stuck in Stagflation

Experts see no scope for easing as the Monetary Policy Committee (MPC) meets on Monday to set key macroeconomic rates despite the fact that Nigeria is stuck in stagflation.

Consensus expectations ahead of the meeting is that MPC will be more likely to hold key rates to drive the Central Bank of Nigeria (CBN) pro-growth stance.

Rising inflation and unemployment rate means policies strategy for managing the Nigerian economy has failed to yield result.

This has widened misery index amidst growing number of poop citizen that are unable to meet average living condition as Nigerian joblessness now rank second globally.

“We suspect that stagflation in Nigeria is the by-product of policy preferences that the authorities seem determined to stick to.

“Chief among them is keeping the currency stable. Policymakers’ reluctance to let the naira weaken means that it remains overvalued”, a London-based firm, Capital Economics stated.

Nigeria lying in economic bed policy makers made

In a new report, the firm explained that the past week has brought further evidence that Nigeria is suffering from stagflation. Inflation has skyrocketed to 17.33% amidst rising unemployment rate which hits record high in the fourth quarter of 2020 at 33.3%.

“We suspect it’s a ‘chronic condition’ arising from poor policy choices rather than an ‘acute disease’, Capital Economics explained in the report.

After 18 consecutive rise in food prices, the firm comes to term that price pressures in Nigeria are certainly elevated.

It said the headline rate has exceeded the central bank’s 6-9% target range since mid-2015 and figures released earlier this week showed that inflation jumped to a four-year high.

Meanwhile, the economy contracted by 1.9% last year, as Capital Economics noted the contraction to be the steepest downturn since 1993.

“Unemployment rose to 33.3% in Q4 of fiscal year 2020 – the second highest globally according to Bloomberg”.

“We suspect that stagflation in Nigeria is the by-product of policy preferences that the authorities seem determined to stick to.

“Chief among them is keeping the currency stable.

“Policymakers’ reluctance to let the naira weaken means that it remains overvalued. Indeed, the currency trades over 20% weaker on the parallel market”, the research firm stated.

It added that a large gap between the official and black market rates has probably contributed to high inflation as traders using the parallel exchange have increased the price of imported goods.

At the same time, foreign exchange restrictions imposed by the Central Bank of Nigeria (CBN) to reduce pressure on the naira appear to be disrupting economic activity.

It said for instance, about 200,000 tons of agricultural exports were stuck at ports in December due to a new CBN rule.

At the time, the National Cashew Association of Nigeria estimated that this resulted in the loss of around $1.3bn in non-oil export revenues.

Read Also: No Quick Fixes for Economic Challenge in Nigeria, Others –CBN Deputy

Recalled the World Trade Organization joined other multilateral institutions in raising concerns about Nigeria’s foreign exchange management this week.

The firm said disagreements over the currency seem to be behind the hold-up in approving Nigeria’s $1.5bn loan request from the World Bank.

Nonetheless, Capital Economics maintained that Nigerian policymakers don’t seem to have any inclination to shift tack.

“As long as that remains the case, stagflation is likely to persist”, the firm said.

No scope for easing

Policymakers at the Central Bank of Nigeria (CBN) are likely to keep their benchmark rate on hold at 11.50% on Tuesday, Capital Economic said in the report.

The headline inflation reached a four-year high of 17.3% in February as price pressures rose across the board. Food inflation, which makes up over half of the CPI basket, rose to 21.6% year on year.

Experts said Nigeria’s recovery will be held back by weakness in the oil sector on the back of OPEC+ production cuts and a slow vaccine roll-out.

“We suspect that in the face of weak activity, policymakers will refrain from hiking interest rates in response to high inflation”.

The policy rate is likely to stay unchanged at 11.50% on Tuesday, Capital Economics reports read, noting that the headline inflation rate will probably stay high in the coming months.

“But once inflation drops back more markedly, probably in the second half of 2021, we think that the CBN will err towards cutting rates to support the economy.

“The recovery is likely to stay sluggish and, at recent MPC meetings, the focus seems to have shifted away from inflation fears and towards weak activity”, the firm explained.

Supporting the view, Greenwich Merchant Bank is also expecting the Committee would back its pro-growth stance by holding the key parameters at their current levels.

The banking group projects MPC will maintain monetary policy rate (MPR) at 11.5%, CRR at 27.5%, Asymmetric corridor at +100/-700bps around the MPR, and Liquidity ratio at 30.0%.

Analysts said recent events on the global scene should weigh on the decision of the Committee at this meeting, as considerations should fall along the lines of the rapid vaccination rollout, the extended fiscal and monetary policy support, the anticipated economic rebound, as well as higher inflation expectations.

Overall, the policy-setting Committee remains faced with three options: to tighten, hold, or lower the key policy rate.

“Although, we opine a tightening stance could drive back capital flows to help boost external reserves, stem inflationary pressures, and bring in the much-needed price stability, it could also distort the progress achieved so far in supporting growth”, Greenwich explained.

It said on the other side, while a loosening stance could hasten an economic recovery, helped by the lower credit environment, it could also worsen the real rate of returns and persistent price pressures.

“Against this backdrop, we see the Committee embracing its current stance. We remain conscious of the MPR’s weak transmission effect, which supports the Bank’s use of unorthodox policies, as assets remain unanchored by the policy rate.

“Case in point, the steep rise in Open Market Operation (OMO) yields appears to have set the tone of fixed income rates, pushing up stop rates at the Primary Market Auctions (PMAs) for T-bills and the Bonds to 6.8% (average 364-day) and 11.8%, from 1.2% (average 364-day) and 7.0% respectively.

“Ultimately, a possible increase in the MPR just might suggest that authorities are prioritising efforts to control inflation over economic growth”, Greenwich added.

The firm stated that this is on top of the growing FX challenges which remains a major concern towards productivity capacity, and invariably economic growth.

Though, the mounting inflationary pressures points to structural issues, largely supply shocks, the Committee posits this could be partly mitigated, given the ongoing support programs in the Agriculture space, alongside the base effect, that should ease by the middle of the year.

“Also, the policy incentives introduced to drive FX liquidity towards the proper channels could continue to moderate upward pressures on the currency, however, we do not see this as a panacea to solve the current FX difficulties”, Greenwich noted.

MPC: Experts See No Scope for Easing as Nigeria Stuck in Stagflation