‘Remedies to Nigerian Economy ails are Outside Scope of Monetary Policy’
President Muhammadu Buhari

Remedies to Nigerian Economy Ails are Outside Scope of Monetary Policy

Remedies to the Nigerian economy ails are outside the scope of monetary policy, South Africa based NKC African Economics, a leading provider of independent economic and political research has said.

NKC said this in a macroeconomic review following the decision of the Central Bank of Nigeria (CBN) committee to maintain status quo on policy rate.

Economists stated that after the Committee compared Nigeria’s stimulus package of a “paltry 4%” of the gross domestic product (GDP) to those of Japan (67%), the UK (45%), and the US (28%), it urged the central bank to “further expand its current stimulus packages to support the fiscal interventions.

It also noted that the Committee implored the government not to consider another strict lockdown so as to not reverse the gains from last year’s stimulus efforts.

“Elevated inflation will prevent further loosening, while a lacklustre economic recovery means that authorities will be apprehensive to tighten.

“Remedies to the Nigerian economy ail are outside the scope of monetary policy, except perhaps the most pernicious affliction: inadequate external liquidity due to an overvalued exchange rate”, NKC posited.

Explaining, Jacques Nel, Head, African Macro at NKC African Economic told MarketForces that inflationary pressures, particularly food price pressures, have been a result of insecurity-induced supply chain disruptions, policy missteps on trade regulation, and a divergence between the official and parallel naira exchange rates.

According to Nel, these have been compounded by bottlenecks and further supply chain disruptions cause by Covid-19 containment measures.

He said monetary policy measures would thus not be effective in dealing with these pressures.

Explaining further, Nel noted that Covid-19 containment measures and the broader impact that the virus has had on the external environment continue to weigh on domestic economic growth.

“Here again monetary policy will not be effective in addressing the issue, as a looser monetary policy stance will not boost external demand.

Meanwhile expansionary policy will also hit a ceiling with regard to effectiveness in an environment where both regulatory restrictions and the fear of being infected weigh on overall economic activity”, he said.   

“That being said, we consider external liquidity constraints the most pressing macroeconomic issue in Nigeria”.

NKC African Economics’ Nel said while this could technically be labelled under monetary policy, the politicised nature of the naira means that it is unlikely that monetary authorities have full discretion over exchange rate policy.

“While it seems both the CBN and central government view the current policy approach – maintaining an overvalued exchange rate and attempting to shore up foreign exchange through other measures – as appropriate, the sensitive nature of the topic means that it is a broader political consideration.

“Allowing a more rapid devaluation of the official exchange rate will ease external liquidity constraints, and could even attract more foreign investment because investors will be more assured that they will be able to get their money out of the country.

“This will of course have inflationary implications, but a tightening in policy will then be able to counter those pressures, while serving as another channel to generate foreign exchange inflows.

“This is of course not an easy decision as unemployment is already very elevated and a further increase in inflation will hurt consumers over the short term.

“However, this would be the only way to get Nigeria out of the current economic rut, bar an unexpected surge in oil prices, but even then the inherent economic fragilities will persist.

“Given the current environment, it is unlikely the government will be willing to risk a further increase in short-term dissatisfaction with the aim of addressing the country’s economic issues over the medium term”.

MarketForces had reported that government decision to close its land borders sometimes in August 2019 impacted the price level negatively.

For 16 months consecutively, headline inflation rate maintain an uptrend before it settled at 15.75% in December, 2020.

In the just concluded first meeting in 2021, MPC kept the policy rate unchanged at 11.5% and retained all other policy parameters following the first meeting of the year.

The committee highlighted concerns regarding the sluggish economic recovery, attributing the slowdown to the resurgence in Covid-19 cases, FX pressures, higher production costs, and increasing consumer prices.

On the latter, NKC noted that the MPC expressed uneasiness over the relentless uptick in inflationary pressures, particularly food price inflation.

However, rising food prices were attributed to logistical bottlenecks, spurred by security challenges in many parts of the country – thus deemed outside the influence of monetary policy.

NKC maintained that other factors driving core inflation include the recent deregulation of the downstream oil industry, which has led to higher petroleum prices, and the upward adjustment in electricity tariffs.

Meanwhile, the Committee expects growth headwinds to moderate in the short to medium term due to virus containment measures and economic stimulus by both monetary and fiscal authorities.

Other notable figures presented by the MPC include an increase in the banking sector’s non-performing loans ratio from 5.9% in November to 6.0% in December and a slight increase in FX holdings, from $34.9 billion at the end of November to $36.2 billion.

The banking sector non-performing loans still stand ahead the prudential maximum threshold is set at 5.0% by the regulatory authority.

The CBN governor indicated that lenders have been instructed to ensure that export proceeds are repatriated.

NKC interprets that this suggests that exporters have been hoarding greenback or circumventing the official channels to make use of the more attractive rates on the parallel market.

The central bank now plans to restrict exporters who fail to remit hard currency proceeds from banking services by January 31.

‘Foreign Exchange Rates to Converge When CBN Begins Full Intervention’

“Dollar shortages have led to a range of macroeconomic issues, curtailing economic activity as importers are unable to source hard currency, while introducing policy uncertainty as authorities becomes increasingly desperate in their attempts to shore up FX holdings”, NKC noted.

Remedies to Nigerian Economy ails are Outside Scope of Monetary Policy