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Nigeria Monetary Policy Makers Balk at Rising Inflation

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By Lukman Otunuga, Senior Research Analyst at FXTM,

In January, the Central Bank of Nigeria (CBN) decided to hold the lending interest rate at 13.5 percent and significantly increase the Cash Reserve Ratio (CRR) from 22.5 percent to 27.5 percent. Far from following the global easing trend, the CBN is taking steps to tighten monetary policy.

The decision follows a worrying rise in inflation in December. Inflation rose to 11.98 percent, meaning that day-to-day living is becoming more expensive as prices for goods and services rise.

Part of the added inflationary pressures are because of border closures and food shortage fears.

On a long-term basis, the Naira’s softness feeds into the dam of rising inflation.

Despite the threat of higher inflation, the CBN has ruled out devaluing the Naira. Policy makers could have a point here. An even weaker local currency may trigger worse consequences. The overflowing dam could break and hyperinflation – a nightmare scenario for any emerging economy – could flood the economy.

The central bank’s reasoning for avoiding an official devaluation is that it holds ample foreign reserves to back the Naira’s value. Policy makers are also banking on rising Oil prices to shore up the $38.6 billion in foreign reserves, at the time of writing. The CBN brushed off the steep drop in foreign reserves from $42 billion to $38 billion in the last months of 2019, pointing out that fluctuations are normal.

Unpredictable CBN policy may impact banking sector

Less liquidity in the market might alleviate rising inflation but on the other hand, it could add to everyday economic pressures. A combination of high interest rates and less liquidity could squeeze corporate budgets, possibly leading to job losses and lower investment in development, not to mention increasing the chances of debt defaults. This may impact the stability of the banking sector in the medium-to-long term.

Fiscal deficit projected to widen

On the monetary policy side, higher Oil prices are pulling in more foreign reserves. But as Oil prices rise, so do fuel subsidies paid by the state, creating a precarious fiscal situation. Nigeria is now set to borrow N1.59 trillion to fund the 2020 budget and the government has increased VAT to 7.5 percent from five percent to boost tax revenues.

External threats pose significant risks to Nigeria’s recovery

Other pressures bearing down on Nigeria’s economy stem from the US-China trade war which is frozen at the moment but could heat up at any time.

The central trading issues for Nigeria in this situation are China’s economic health – China and Nigeria are strong trading partners – and the health of the global economy. If the global economy slows down further, demand for Oil would likely weaken and prices could experience more softness in the near term.

The economic costs of the coronavirus outbreak to Nigeria’s economy must not be overlooked. China is Nigeria’s largest trading partner with total trade hitting $3.25 billion during the third quarter of 2019. If the virus outbreak in China results in slower economic growth, the spillover effect is likely to be felt in Nigeria as trade falls.

The other major international shift is the Brexit process. The UK’s withdrawal plan from the EU has been approved by European and UK-based legislatures. Although the UK officially leaves the EU on January 31, over the next year trade agreements will stay as they are. After that, there is considerable uncertainty over the status of trade deals agreed with the UK through the EU.

As a start, the UK-Africa Investment Summit promises a way forward for future trade deals direct with UK partners. Four British companies signed deals with Nigeria for street lighting, airport control towers and smart metering. The question is whether this momentum can be maintained now that the UK has so many trade deals to put in place with the EU, US and China. On top of that, Nigeria’s trade relations with the UK are now separate from those with the EU, meaning that the UK’s negotiating power and economies of scale are considerably reduced.

In conclusion, Nigeria’s fiscal and monetary policy makers face a difficult economic landscape. The mountain of uncertainty around the US-China trade disputes; the quicksand of the Brexit process; economics impacts of the coronavirus and the rising tide of inflation.

Could the next step be for the CBN to raise interest rates? Amid the current uncertainty, nothing can be ruled out but the impact of stiffer borrowing rates would likely pressure economic growth. With GDP on a growth trajectory, this would add to Nigeria’s economic headwinds. 

 


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Ugo Onwuaso is an ICT enthusiast. He believes technology should be used for general good. He holds a Master of Public Administration (MPA) degree from the Lagos state University.

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E-Financial

FG Makes u-Turn on Bank Account Re-Registration

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Federal government on Friday apologised for asking all account holders in financial institutions in the country to re-register their personal details.

FG makes u-Turn on Bank Account Re-Registration

Recall that the federal government had on Thursday ‎ordered that all persons holding accounts across financial institutions and insurance firms should complete and submit self-certification forms to their respective financial institutions.

The notice issued by the government to that effect read, ‎“This is to notify the general public that all account holders in Financial Institutions (Banks, Insurance Companies, etc.) are required to obtain, complete, and submit Self – Certification Forms to their respective Financial Institutions.

“Persons holding accounts in different financial institutions are required to complete and submit the form to each one of the institutions. The forms are required by the relevant financial institutions to carry out due diligence procedures, in line with the Income Tax Regulations 2019.‎”

The directive raised eyebrows, as account holders already possessed Bank Verification Numbers.

Following widespread condemnation that trailed the directive, the Federal Government backtracked on Friday, saying the fresh guidelin‎e was not for all Nigerians.

The government attributed the development to misinformation.

The clarification issued by the government on Friday read, ‎“We apologise for the misleading tweets (now deleted) that went up yesterday, regarding the completion of self-certification forms by Reportable Persons. The message contained in the notice does not apply to everybody. ‎FIRS will clarify Nigerians on the objectives of the directive.”

Also on Friday, FIRS, in a statement posted on Twitter, explained that the guidelines were only for non-residents, as well as people paying tax in more than one country.

Parts of the FIRS statement read, “The Self Certification Form is basically to be administered on Reportable Persons, holding accounts in Financial institutions, that are regarded as “Reportable Financial Institutions” under the CRS.

“Reportable persons are often non-residents and other persons, who have residence for tax purposes in more than one jurisdiction or country.”

“The information that indicates an account holder is a resident for tax purposes in more than one jurisdiction, is expected to be available to Financial Institutions during account opening processes, for the KYC and AML purpose.”


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Stanbic IBTC Bank Disowns Lagos ATM Fraudster

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Stanbic IBTC Bank PLC has disowned Tope Olajide, 22-year-old fraudster arraigned for theft of customers deposits.

Stanbic IBTC Bank Disowns Lagos ATM Fraudster

The Bank said this in a statement on Wednesday.

The statement said: “The attention of the management of Stanbic IBTC Bank PLC has been drawn to news currently circulating in the media, about the alleged arraignment of staff of the Bank on charges bordering on the theft of customers deposits.

“The Bank would like to clarify that the defendant, a 22-year-old Tope Olajide, IS NOT, and was at no point in time an employee of Stanbic IBTC Bank PLC.

“The alleged culprit was apprehended around 7:30 am, on Thursday, 27 August 2020, by security operatives after he was exposed by CCTV footage using ATM cards he had allegedly stolen and converted, to make withdrawals from the accounts tied to the stolen ATMs.

“The CCTV footage also showed the alleged culprit pretending to assist customers at ATMs whilst also attempting to fraudulently dispossess the customers of their ATMs.

“He was subsequently arraigned before an Ikeja Magistrate Court on Monday, 14 September, for stealing the debit cards of two customers and using them to unlawfully withdraw the sum of N427,000.

“The Bank would also like to implore members of the public to be security conscious when conducting transactions at ATMs. Customers are advised to report any suspicious actions around them to security operatives who are usually stationed around the Bank’s ATMs, when carrying out transactions at any of our ATM locations.

“As an organisation, we hold dear the values of integrity, and we will continue to prioritise the safety of our customers effectively.”


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Buhari Okays Establishment of CBN-Led Infraco

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President Muhammadu  Buhari has approved the establishment of an   Infrastructure Company (Infraco) to be driven by the Central Bank of Nigeria (CBN) in partnership with the African Finance Corporation (AFC) and the Nigerian Sovereign Investment Authority (NSIA).

Buhari Okays Establishment of CBN-Led Infraco

Mr. Godwin Emefiele, CBN governor

This is coming  on the heels of the foreign reserves’ slump to $36 billion following a cocktail of monetary policy interventions by the apex bank to cushion the scathing effects of the COVID-19 pandemic on the economy.

Mr Godwin Emefiele, CBN governor, made these disclosures in Abuja at the annual conference of the Chartered Institute of Bankers of Nigeria (CIBN) with the theme: Facilitating a Sustainable Future: The role of Banking and Finance.

According to him, Infraco would enable the use of private and public capital to support infrastructure investment that will have a multiplier effect on growth across critical sectors.

“This entity would also be able to raise funds from the capital markets and mobilise long term finance to address some of our infrastructure needs, while providing reasonable returns to investors. “We believe this well-structured fund can act as a catalyst for growth in the medium and the long run. The support of the banking community will be important in achieving this objective.

“A well-built infrastructure system, comprising hard infrastructure such as roads and ports, and soft infrastructure such as broadband penetration, can have a multiplier effect on growth by enabling the expansion of business activities in the country”, he explained.

On foreign reserves, Emefiele attributed its crash to the decline in foreign exchange earnings and subsequent adjustments in the value of the naira to the dollar.


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