THE recent interest rate increase by the Central Bank of Nigeria (CBN) is expected to support investment inflows, mainly from portfolio investors, in the near term said a herd of analysts.
Between January and February 2024, Foreign Portfolio Inflows (FPI) inflows have surged 58 percent. This, combined with the 4x rise in remittance inflows and rebounding oil and non-oil export earnings, will support external reserves, aiding the CBN’s intervention efforts at the official foreign exchange window.
At its second meeting for the year, the Monetary Policy Committee (MPC) maintained its hawkish stance, raising the benchmark interest by an additional 200 basis points (bps) to 24.75 percent after the 400bps increase in February.
The bank reverted the asymmetric corridor to +100/-300bps from +100/-700bps and retained the liquidity ratio and CRR at 30 percent and 45 percent, respectively.
This move according to analysts signals the CBN’s unrelenting efforts to rein in inflation, which stood at 31.7percent in February, stabilize the naira further (N1,309/$), slow money supply growth (79% y-o-y), and bolster investor confidence.
The high-interest rate environment does not hold promise for the private sector seeking credit for business expansion in the near term, according to Bismarck Rewane analyzing the MPC’s decision in an interview on Channels TV.
While this trade-off is imminent during inflationary times, it is worth considering at the next MPC meeting to prevent the economy from overheating amid rising poverty levels, shrinking productivity, and dwindling consumption.
He believed that it will take time for exchange rate gains to translate to reduced commodity prices in the open markets, indicating a prolonged period of the cost of living crisis in the short term. Still, the future holds bright promises. As they say, it’s not over till the fat lady sings!
Also, Analysts at Proshare Research noted that tight monetary policy will linger as Nigeria’s Central Bank (CBN) struggles to bring inflation. The battle will be dirty and rough as the CBN uses cash reserve ratios (CCRs) and the monetary policy rate (MPR) to hold down credit growth and raise interest rates.
So far, the gambit has not worked. However, two different schools emerge on the effectiveness of rate hikes and credit constraints to curb inflation according to the analysts.
“The first school believes that tightening credit and raising interest rates would reduce money supply growth and encourage savings, which would discourage consumption. Unfortunately, this has not happened over the last two and a half years of consistent monetary policy tightening. Higher MPR has been mirrored by higher headline inflation.
“The second school has seized on the failure of policy rate hikes to curb inflation, arguing that the primary inflationary driver is the foreign exchange rate. The school argues that the CBN could raise MPR to as high as the heavens without dragging inflation down. They make the point that the problem is one of FX supply inadequacy and not excessive domestic money supply. This school argues that an expanding economy will naturally experience growth in money supply to support the expansion of real sector activities. ‘If we are going to bring down inflation,’ notes one of the school’s advocates, ‘we need to increase the FX supply, “ the analysts from Proshare observed in a note to clients.
A way to do this is to financialize public assets by listing them on the local exchange, NGX, and by issuing licences to private companies in mining, manufacturing, and services.
Following the rate hikes at the first meeting of the Monetary Policy Committee, a few positive developments have occurred.
According to analysts, the developments could be attributed to the post-MPC meeting interventions of the CBN on creating FX stability and relative restoration of investors’ confidence.
“In keeping with the words in the CBN Governor’s statement to process and clear a valid inherited backlog of US$ 7 billion in claims, on Wednesday, March 20, 2024, the CBN disclosed that all pending but valid foreign exchange backlogs had been cleared. Nigeria’s external reserve rose by US$ 993 million to US$ 34.11 billion as of March 7, 2024, the highest level in eight months.
“Foreign portfolio investments climbed by over $1 billion in February 2023 as total portfolio flows hit US$ 2.3 billion thus far in 2024 compared to US$ 3.9 billion recorded in FY2023.
“Overseas remittances rose to US$1.3 billion in February 2024, more than four times the US$300mn received in January 2024.
The allocation of 2.15 million bags of fertiliser, worth over N100 billion, to the Federal Ministry of Agriculture and Food Security for disbursement to farmers to enhance agricultural production in the country, “ Proshare stated.
According to the CBN governor, this aims to enhance the nation’s food production capacity and security, curb inflation, and ultimately ensure price stability. This does not indicate that the CBN is returning to quasi-fiscal and developmental roles.
In line with Proshare analysts’ expectations, inflation remained elevated. However, the exchange rate appreciated over 45.71 percent from a low of N1900 to $1 on February 22, 2024, before the MPC’s first meeting, to N1304 after a month on March 26, 2024.
“We expect further appreciation of the Naira in the coming month; however, growth will remain constrained in the first half of 2024.
“The aggregate rate hikes in two MPC meetings were majorly to anchor inflation at a targeted 21 percent at the end of 2024. Some analysts question the pace and interval between rate hikes as a lag that will always tend to exist between periods of policy pronouncement, implementation, and effect.
“In the immediate period, inflationary pressures have persisted, and Proshare analysts have observed that the economic stability of households and businesses have been hurt severely, “ Proshare Research noted.
The CBN’s rate hikes and policy decisions have had a major impact on naira appreciation, but the impact on curbing inflationary pressures in the economy remains to be seen.
Analysts expect inflation to rise, driven by low output and productivity, insecurity, logistic hurdles, energy costs, sellers’ desire to retain higher prices and cover costs, and imports as the exchange rate remains above the N668.7/$ average in 2023.
“The purchasing power of the household will further erode as households’ ability to procure goods dwindles further. Households will continue to experience food insecurity crisis and increased dependency levels.
“Increased dependency on household members with higher income levels will persist, impacting the ability to take full advantage of investment opportunities and save for rainy days.
“The psychological and mental health of individuals in the household may be affected as individuals face tougher periods and sometimes seek income as they delve into several activities.
“Investment and productivity to fall as manufacturing sector players are constrained in sources of accessing cheaper loans to boost output growth.
“Elevated borrowing costs will result in increased operations and production costs, which will be passed on to the final prices of goods and services. Hiked rates will increase business borrowing costs, as banks may segregate loan advancements to remain cautious about loan default, “ it stated.
Against this background, the government must confront the problems of direct foreign investment (DFI), public asset securitization, and financialization head-on. Proshare analysts have called for proper policy sequencing, policy signals, and attention to significant inflation drivers.
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