CBN: Same old pill

CBN Godwin Emefiele Naira
Central Bank of Nigeria's (CBN) governor Godwin Emefiele

With electioneering fever already creating heightened challenges for liquidity management, Nigerians can expect the Central Bank of Nigeria (CBN) to resort to desperate measures. Barely two months after Monetary Policy Committee (MPC) raised the industry’s reference lending rate from 11.5 percent to 13 percent after a two-year freeze, the body last week announced another hike from 13 percent to 14 percent. This time, it added a stern warning to bank customers, especially politicians, to stop the practice of converting their naira holdings to the dollar or be ready to face its wrath.

“We are monitoring customers and banks; any banks (sic) involved will be sanctioned. We will place Post no Debit on the defaulting customer’s account. It is a very injurious tool to stop you from conducting illegal flows, either domestic or foreign currency,” CBN Governor Godwin Emefiele was quoted to have said.

Clearly, if the rate hike was expected – even if less justifiable at a time production costs are at their stratospheric levels ever – the threat to sanction forex regulation violators, reeking somewhat of frustration although not without foundation, must have presented a new twist.

While party politics has become a cash-and-carry affair, just as Nigerians continue to watch with consternation, the dollarization of the process heaps pressure on the forex market already badly strained. Taken together with the naira’s free fall in the midst of unprecedented global inflation, rising energy costs, a deepening crisis of logistic management and food inflation in particular, the CBN, now at its wit’s end, must have wondered about what additional measures are needed to stave off the crisis.

As always, the issue is whether the tools routinely deployed actually work. Here, an evaluation of the impact of the measures over time would seem to suggest a problem so complex in its ramification and certainly far beyond what the routine tinkering with the MPR could ever seek to address.

Agreed, inflation has remained the elephant in the room. However, if the constant refrain about inflation targeting and with it the MPR pill that has become too generously deployed is all there is to cure the problem, we ought to have seen some steady, measured progress both in terms of its moderating effects on inflation and also its overall efficacy as a tool. What the data suggest isn’t just a country moving in circles but the imperative of a fresh approach to dealing with fundamental problems.

The rate of inflation currently standing at 18.6 percent is probably among the highest in the world. Last year when it was 16.95 percent, the World Bank rated Nigeria among the top 10 countries in the world with the worst inflation rates. True, a great deal of the factors behind the latest inflationary spiral are exogenously induced – the Russian-Ukraine war, the worsening energy crisis, etc. – yet, it is also a notorious fact that the CBN’s monetary easing – justifiable as it appears to be, and for which it now seeks monetary tightening –  actually contributed significantly to the wave.

At this point, the pertinent question that must necessarily follow is what the hike forebodes for the nation’s real sector, which aside grappling with the high cost of energy, particularly of diesel, would now have to deal with higher cost of borrowing. And this is the same sector whose access to forex has been severely curtailed as the CBN seeks the best way to ‘allocate’ the limited forex available, a sector forced to pay premium while the current chaotic rule of forex management endures – and all of these at a time the real incomes of consumers continue to suffer decline across the board. How the CBN hopes to resolve the dilemma remains to be seen.

It is the same way we see plans by CBN to move against speculators which, although good on paper, merely present the regulator a catharsis or at best a stunt to mitigate its palpable frustration and perceptible loss of control. Nigerians are only too familiar with the dark jungle that the financial services sector has become to pay serious attention to such facile threats. Not with ubiquitous forex traders along cities’ highways in their open kiosks wreaking havoc on the naira on daily basis.

Hopefully, it is still not late in the day for bold, complementary measures from the fiscal authorities – measures that are currently lacking – to save the situation.

Subscribe to our Newsletter

* indicates required

Intuit Mailchimp