Would CBN Hawkish Mood Curbs Capital Flight
Godwin Emefiele, CBN Gov

Would CBN Hawkish Mood Curbs Capital Flight?

From an extreme dovish stance, Nigeria’s monetary policy authority became fast and furious with thunder’s light-speed interest rate hike as the inflation rate spiked. Some experts have criticised the move that it is too sudden and the private sector will bear the grunt.

However, MarketForces Africa analysts believe an interest rate hike is needed but there will be far-reach effects on the local economic growth amidst stagflation conditions, thus querying the timing and size of the uptick.

The Central Bank of Nigeria (CBN) which is saddled with a responsibility to maintain a stable price level in the economy had persistently attributed inflation rate surge to disruption in the supply chain – a fine veritable alibi following the covid-19 outbreak.

The pressures on price level worsen after Russia invaded Ukraine and the subsequent energy price crisis that saw Nigeria’s subsidy payments jumping to N4 trillion. Perhaps, it might hit N6.72 trillion in 2023, according to Finance Minister.

In less than three months, the apex bank increased the benchmark interest rate, up by 2.50% to 14%, reverting to an era where Nigerian banks would stay glued to the fixed income market to generate heavy income.

Long donkey years of low-interest environment halted in a jiffy due to hot red inflation pressures. The CBN is not alone in the game. Federal Reserve’s Open Market Committee are also on macroeconomic tightening as the inflation rate becomes uglier at 9.1% in the United States. READ: Fitch Sees Two Fed Rate Hikes in 2022, Four in 2023

Hot money will move around across the emerging and frontier markets. It’s simple, keeping a low-interest rate will make the Nigerian economy uncompetitive but the timing isn’t really right for the citizens who are already battling weak macroeconomic pressures.

Foreign investors have not been positive about the Nigerian economy due to their inability to get dollars out of the country and of course, its previous low-interest rate environment had impacted their sentiment.

The Nigerian economy has been recording foreign interest exists from the equities and fixed income market while MSCI Index has initiated a move to downgrade Nigerian Indexes, citing foreign currencies dividend repatriation backlog.

Though, the Nigerian external reserve has been relatively stable at around $40 billion; market intervention appears to have slowed down. At the official window, Naira was above N430 early this week. Naira has been swinging left, right and centre – and the pendulum movement has been mostly on the weakening side.

In fact, Broadstreet analysts’ consensus remains that the naira is overpriced but CBN is unlikely to devalue the local currency – playing tough economic conditions as an alibi for its unorthodox policy measures while maintaining capital control to stem the naira from falling sharply.

How about the redenomination of the local currency? A Meristem economist is of the view that this option is open, perhaps in lieu of persistent naira depreciation. Nigeria imports inflation to the country with its higher dollar payments while export earnings from non-oil related deals have been unimpressive.

The country must generate enough from selling non-oil products outside the country but how would it do so with poor country advantage and faulty economic structure?#Would CBN Hawkish Mood Curbs Capital Flight?

//…to be continued