Read on how ERGP can modify its monetary policy’s prime objectives in lieu of current challenges as rising inflation and low GDP growth.
The primary objective of the ERGP’s monetary policy is to encourage growth without increasing price volatility. However, given the slow growth in 2016, the current challenge is how to balance price stability with growth objectives.
Since the second half of 2014, the decline in crude oil price and the resulting low growth in external reserves, rising inflation, excessive demand in the foreign exchange market, and declining GDP growth have stretched Nigeria’s monetary policy to the limit.
Inflation doubled from 9.5 per cent in December 2015 to 18.5 per cent in December 2016, driven by higher energy and food prices and the depreciation of the naira, itself the result of external shocks. The Central Bank of Nigeria’s (CBN) monetary policy decisions and actions have prioritized price stability.
In 2015, it introduced a ban on forty-one (41) goods and services from accessing foreign exchange in the inter-bank foreign exchange rate market. The ERGP recognises the 41 items policy as a temporary policy measure that would be reviewed with a view to removing the market restrictions over time. Furthermore, the CBN is in the process of improving the implementation of its current policies, aimed at achieving a market-determined exchange rate regime to build confidence and encourage foreign exchange inflows.
Net domestic credit is projected to expand significantly over the Plan period, at an average annual growth rate of 15.8 per cent, with the projected annual growth rate rising from 10.3 per cent in 2017 to 19.9 per cent in 2020. According to the plan, while Government domestic credit is projected to fall from 14.2 per cent in 2017 to 10.7 per cent in 2020, that of the private sector will increase from 10.7 per cent in 2017 to 19.0 per cent by 2020.
CBN governor, Mr. Godwin Emefiele said CBN was acting in the best interests of ordinary Nigerians, regardless of the noise from the few entrenched interests whom the bank’s policies may be hurting.
“Let me also reiterate the central bank’s willingness, determination, and capacity to continue to meet all legitimate transaction-based FX demands in the market. I obviously cannot be of help to people or businesses who are into speculative FX demand. My promise instead to this group, whether foreign or local, is that the CBN will make sure they lose money!”
Robert Omotunde-led analysts at an investment research company, Afrinvest West Africa Limited said, robust growth of the agricultural sector and improvement in retail market FX liquidity are expected following the recent release of the ERGP.
Whilst Afrinvest view the CBN’s decision to “do nothing” as the most optimal play considering the choices before committee members at the last meeting, “we note that there are still unaddressed cyclical and structural vulnerabilities which constitute headwind to economic performance in the short to medium term. These include:
The government, through the Central Bank of Nigeria also aims to implement a market-determined exchange rate regime to build confidence and encourage foreign exchange (FX) inflows.”
Also, former governor of the Central Bank of Nigeria Professor Chukwuma Soludo did not completely support CBN’s exchange rate policies. Soludo faulted the federal government’s recently launched Economic Recovery and Growth Plan, saying that “while we are fixated on stopping the imports of toothpicks and stopping the petty traders from taking dollar cash away, we have created havoc that shutdown many factories as well as ignited massive capital flights and halted capital inflows. Put simply, we have missed the macro picture. While we are winning selected micro battles, we are losing the war on the macro economy.”
Indeed, analysts believe that t he CBN’s FX cash flow data available till January 2017 suggest the growth in external reserves is being partly driven by non-core (and potentially non-recurring) FX inflows, calling into question the ability of the CBN to continue to intervene in the currency market at current run rate if the interbank market peg is not given up to allow for autonomous investment inflows. Inflows from swaps and an unidentified item tagged “other official receipts” supported flows between November 2016 and January 2017, while oil receipts inflow through the central bank declined.
“Our discussion with players in the real sector revealed that though access to FX has improved for corporate end-users with tenors of forward contracts now shorter, there is still considerable time-lag between demanding for FX and obtaining supply.
“The CBN also remains the dominant player, indicating that the improvement in the balance of payments and aggressive CBN interventions are yet to fully transmit into business and investment confidence. Perhaps it will, in the long-run.”
“For the fact that the macroeconomic framework will be updated in due course to reflect changes that will arise from these policy initiatives, most analysts believe that whatever flaws discovered in the course of implementation would be rectified.
Nigeria’s banking sector has become more vulnerable because of banks’ higher exposure to high-risk loans (including to the oil and gas and power sectors), lower liquidity buffers, and the difficulty of paying back loans denominated in foreign currencies.
The CBN promises strengthen the banking sector and increase its resilience through the activities outlined below:
Reduce inflation to single digit by 2020, maintain a competitive exchange rate, boost foreign exchange reserves, ensure a supply of adequate credit to the private sector at reasonable lending rates and minimum other charges, encourage banks to improve capital adequacy, help banks to embark on aggressive debt recovery efforts, mitigate credit risks by limiting the concentration of credit of a certain risk category and enforcing limits on foreign exchange net open positions and reinforce supervision of banks and reporting transparency, including on non-performing loan.