Business
President Tinubu seeks urgent reform in monetary policy regime
BY EMEKA EJERE
Early policy statements of President Bola Tinubu, suggest that the days of continuous tightening of monetary policy with the aim of taming surging inflationary pressure in Nigeria may have been over.
Rather, the economy is more likely to be going the direction of business/investment-friendly policy environment with a view to tackling supply-side propellers of inflation.
In response to the persistent upward trajectory in inflation, the Central Bank of Nigeria (CBN) has raised the baseline interest rate from 11.5% to 18.5%, resulting in a whopping 700 basis point increase. The unprecedented rise in rates is aimed at reducing the pace of inflation, regardless of the consequences.
But Tinubu is apparently concerned about the investment implication of the trend. He is also no less worried about the negative implications of multiple exchange rate, which has been a subject of debate among analysts.
In his inaugural speech last week, the President said the current 18.5 percent interest rate of the CBN is “too high” and needed to be adjusted downwards to encourage investment. He also charged the apex bank to work towards a unified exchange rate.
He had said: “Monetary policy needs thorough house cleansing. The Central Bank must work towards a unified exchange rate. This will direct funds away from arbitrage into meaningful investment in the plant, equipment and jobs that power the real economy.
“Interest rates need to be reduced to increase investment and consumer purchasing in ways that sustain the economy at a higher level. Whatever merits it had in concept, the currency swap was too harshly applied by the CBN given the number of unbanked Nigerians.
“The policy shall be reviewed. In the meantime, my administration will treat both currencies as legal tender.”
This policy position, especially that mandating the unification of the exchange rate, was soon bogged down in controversy between the Central Bank and a national daily, Daily trust newspaper, which reported on Wednesday that the apex bank had devalued the naira, and attracting a strong rebuttal from the bank.
The newspaper had reported that the naira was devalued from the CBN window rate of N432 per dollar to N678, which is Import and Export (I&E) window, apparently in a bid to unify the rates.
As at the time of this report, the situation remains unclear as to the appropriate rate now applicable in the market. But it is clear that something has to be done to meet the president’s expectations.
Nigeria currently runs multiple exchange rates, with the official and black markets jostling for foreign exchange buyers. The multiple exchange rates regime has often been criticised by the private sector.
Also, the International Monetary Fund (IMF) and the World Bank have consistently spoken against the multiple exchange rate regime, advising the Nigerian government to merge them.
Tinubu’s assurance to end the multiple exchange regime is in line with his campaign promise that his administration will collaborate with the monetary policy to strengthen the Naira in the foreign exchange market.
He projected that in the first term of his administration, the Naira exchange rate to Dollar will trade at N200, which is close to the level it was before Buhari became President.
“My administration will collaborate with the Central Bank to harmonize the fiscal and monetary policy to achieve immediate stabilization of the value of the Naira against the U.S Dollars and other currencies and in the short term, strengthen the naira by boosting the supply of foreign currency and moderating demand.
“The short-term goal is to achieve a Naira/Dollar rate of 300 naira/US$ and gradually achieve a less than 200 Naira rate over the next four years,” Tinubu promised during his campaign.
Recipe for speedy growth
Meanwhile, some financial analysts have described Tinubu’s position on the need to review current monetary policy as a welcome development that will quicken economic growth.
The Executive Vice Chairman of Hicap Securities Limited, Mr David Adonri, said Tinubu’s intention to review the monetary policy was a laudable objective but whether it can be achieved in the immediate is the concern.
Adonri noted that it was a high inflation rate that led to a high-interest rate, adding that for the interest rate to decline, it means macroeconomic policies, actions, and results will be able to rein in inflation, which is a tall order.
“Unfortunately, they are still dwelling in finance, the speech avoided the huge debt overhang that the economy will grapple with. He did not mention it or give any hint of the plan for managing the huge debt.
“Without an action plan to address the huge debt burden, it will be difficult to bring down interest rates together with inflation. The issue about ending the multi-exchange regime is the right step in the right direction,” he said.
Similarly, Managing Director of Crane Securities Limited, Mr. Mike Eze, in a note seen by Business Hallmark, said Tinubu has an idea of how to run a political system.
He noted that the problem Nigerians had with the immediate past administration is that it was more concerned about the politics of governance than the economics of governance.
“We are going to notice a change in the economy, I think the new government is going to hit the ground running from tomorrow.
His intention to review monetary policy showed that he is prepared for governance. The country is going to be better off, and my hope in him has been rejuvenated, I have the feeling that he has come to work for Nigeria.
“There is going to be a shake-up in the Central Bank of Nigeria, apart from currency mathematics, the rest of CBN’s work is helping to shape the economy. In the last eight years, the Nigerian economy has suffered greatly, the previous administration promised us N1 to $1 but we saw a different thing when they came in.
‘’We are going to notice a positive change very soon, first in interest rate, the high rate of interest rate has been affecting the economy negatively.
“If the interest rate is high, it will discourage foreign investors, but if the rate is low, it will attract foreign investors and also impacts positively on our foreign reserve. Those three areas the president highlighted have a cyclical effect on the economy,” he said.
The Managing Director of Arthur Steven Asset Management Limited, Mr. Olatunde Amolegbe, said the issue of reviewing monetary policy was long overdue but the past administration did not have the political will to address it.
For Amolegbe, the fuel subsidy is hurting national revenue and also impacting negatively both the interest rate and the exchange rate.
“When you are subsidizing, it means you are borrowing heavily and to borrow more, you have to increase the interest rate. The removal of fuel subsidy has an indirect link to interest rates and the forex.
“On the plus side, if the fuel subsidy is removed, it will improve government revenue and the need to borrow will be significantly reduced, which will also impact interest rates positively. That will also have a positive effect on foreign exchange,” he said.
Just last week, the President of the World Bank Group, David Malpass, warned that Nigeria’s parallel exchange rate is harmful as it worsens future debt service payments and increases the risk of debt distress.
Malpass in a blog post titled ‘Parallel Exchange Rates: The World Bank’s Approach to Helping People in Developing Countries’, published on the Bank’s website, said about 24 emerging and developing economies, including Nigeria, have an active parallel currency market.
He added, “In at least 14 of them, the exchange rate premium—the difference between the official and the parallel rate—is a material problem, exceeding 10 per cent.”
In the blog post, which disclosed that Nigeria has an exchange rate premium of 61.7 per cent as of March 2023, the World Bank chief also noted that parallel exchange rates are expensive and can drive corruption.
Malpass said, “The economics on parallel exchange rates is clear: they are expensive, highly distortionary for all market participants, are associated with higher inflation, impede private sector development and foreign investment, and lead to lower growth.
“They benefit the group that has access to foreign exchange at the subsidized rate, paid for by everyone else (which may include the World Bank Group and its stakeholders). Hence, there is also a strong correlation, if not causation, between the existence of parallel rates and corruption.”
