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Thursday, July 02,
2020 05:30 AM / by Proshare Content/ Header Image
Credit: EcoGraphics
The single-sector bias of the Nigerian economy with
its huge dependence on crude oil sales for 90% of its foreign exchange earnings
and 70% of its fiscal revenues lays out a path to a perfect trilemma:
Chart 134: Nigeria's Inflation Rate (%) January 2019 - April 2020
Another major problem faced by the CBN is the question of whether it should continue maintaining the exchange rate at the expense of depleting foreign reserves.
Chart 135: Nigeria's External Reserve
CBN and The Rest of The World
Analysts
believe that the CBN's policy response to the novel Coronavirus or COVID-19 was
late. The argument was that the central bank needed to have anticipated the
consequences of an economic slowdown and put a counter-recessionary monetary
framework in place as early as the first known incident of the virus in
February 2020. This may be somewhat of a stretch. The problem with the COVID-19
virus response by central banks globally was that they adopted swift monetary
policy responses to what was essentially a public health challenge, the
monetary policy measures were more appropriate for issues related to
insufficient domestic liquidity than supply chain disruptions caused by the
pandemic.
In other words,
the challenge is not one of stimulating growth by lowering interest rates or
increasing money supply but that of taking charge of the pandemic by limiting
and reversing its spread. The slowing down of the disease was a health
management problem and not an economic policy challenge.
The use of monetary and fiscal tools could only prove effective when supply
chains are settled and manufacturers kickstart production. The revival of
production would require re-establishing forward contracts and ensuring that
demand cycles were restored. The point of the relevance of interest rate cuts
and money supply growth would be to reduce production costs and improve demand
by off-takers and consumers, two events that were relevant only after the
taming of the pandemic.
To get a handle on the economic
consequence of supply chain disruptions it has been necessary for policymakers
to craft a realistic projection of what the economy would look like (see Table 22). The table gives
insights into where the Nigerian economy may head in 2020.
Table 22: Nigeria Economic Realities
Related Reports (PDF)
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