For once in recent times local analysts had made a right call on the Central Bank of Nigeria's (CBN's) expected monetary policy position; they rightly called the CBN's unlikely policy review in March 2021. The decision to keep all monetary policy rates at previous values was the most likely outcome expected by a majority of economy watchers.
The CBN's Monetary Policy Committee (MPC) voted to retain the Monetary Policy Rate (MPR) at 11.5%, the asymmetric corridor at +100/-700 basis point around the MPR, the CRR at 27.5%, and the liquidity ratio at 30%. The dilemma of a rising inflation rate of 17.33% and an unemployment rate of 33.33% constrained the CBN's ability to either tighten or loosen its monetary policy stance hence, it maintained status quo.
According to the CBN governor "the Committee felt that with inflation at a 3-year high and price stability being the Bank's core mandate, a contractionary policy stance may be required to tame the rising trend. It nevertheless feels that tightening will hike the cost of capital and hamper investments required to create employment and continue to boost recovery. On the other hand, MPC thinks that whereas loosening would lower rate and improve access to credit which will drive investment, reduce unemployment, and stimulate aggregate demand, it feels that loosening will create excess liquidity, which will intensify demand pressure on the foreign exchange market, thereby leading to further depreciation in the currency."
The Inflation-induced Unemployment Trap
Before its second meeting, both unemployment and GDP growth rate figures had not been released. The GDP figures released revealed that Nigeria exited recession in Q4 2020, as its GDP grew by +0.11% defying predictions that Nigeria would only record a rebound in GDP in the second quarter of 2021. Unsurprisingly, however, Nigeria's unemployment rate rose to 33.33% in Q4 2020 from 27.1% in Q2 2020. To further compound the monetary policy authority's woes, the inflation rate rose by a thumping 17.33% in February 2021 from 16.47% in January 2021 largely driven by the increase in food inflation which rose to 21.79%.
The combination of rising inflation of 17.33% and an unemployment rate of 33.33% implied that Nigeria was officially stuffed into a stagflation hole and did not have the luxury of taking both challenges on at the same time. In addressing a positive Phillips curve (a positive Philips curve implies rising inflation and unemployment), most economists recommend that the monetary policy engages in a policy sequence starting from targeting inflation to curbing the rise in unemployment. Therefore, the CBN policies should be geared towards curtailing the rise in the inflation rate before pivoting its focus to a low GDP growth rate (see Illustration 1 below).
Illustration 1: Understanding Nigeria's Economic Conundrum
Analysts note that inflation was a disincentive to savings and investment. Given Nigeria's high inflation rate and its need to attract competitive foreign investment, it suggests that effort needs to be placed in combating spiralling inflation. Curtailing the rise in inflation would instill confidence in investors, increase the incentive to save, and help rejig the aggregate growth of the economy. The increase in Nigeria's inflation rate has been largely attributed to the rise in food cost. The rise in food inflation has been fuelled by a continuous rise in insecurity, FX challenges, logistic constraints, and so on. Therefore, the CBN's policies aimed at combating the high inflation rate must be in tandem with fiscal policies and other measures aimed at combating the rising insecurity, infrastructural challenges, logistics challenges, etc.
To solve the challenges of a rising food inflation rate, the CBN noted that it had intervened in the agricultural sector in line with its development finance role. It noted that it has disbursed the sum of N107.6bn to 548,109 farmers cultivating 703,619 hectares of land between Q4 2020 and Q1 2021 to boost dry season output in support of agricultural value chain development. Total disbursements as of the end of February 2021 amounted to N1.49trn under the various agricultural programs, of which N686.59bn was disbursed under the Commercial Agricultural Credit Scheme (CACS) and N601.75bn under the Anchor Borrowers Program (ABP) to 3,038,649 farmers to support food supply and dampen inflationary pressures. Although these programs are quite commendable and the CBN has consistently argued that performing these development finance roles is within the ambiance of its mandate, economic experts have argued that these roles are better executed by commercial banks, specialized banks, government ministries, etc whose core mandates is tilted towards performing these roles as there has been an increase in the default rate of these loans and interventions provided by the CBN. Economic experts note that the CBN is better placed to execute its price stability mandate rather than developmental finance roles.
In its quest to attract investment, experts have called for the CBN to take the bull by the horn by unifying the exchange rate. A major constraint to attracting investment into the Nigerian economy has been its FX challenge. The Nigerian multiple exchange rate coupled with its poor investment climate has discouraged many investors from pouring their funds into the Nigerian economy. To solve some of these challenges, the CBN announced its 'Naira 4 dollar scheme' aimed at attracting more diaspora remittance, boosting investment, and shoring up its foreign reserves. Although the policy has good intentions, it is prone to arbitrage and is projected to have limited impact given the premium in the parallel market, hence, the full impact of the policy might not be felt in the Nigerian economy.
For the Love of Oil
The only glimmering light at the end of Nigeria's darkish economic tunnel appears to be the rising international oil price. With Brent oil quivering between US$60 and US$70 per barrel between January and March 2021, and the increased number of COVID-19 inoculations, observers hope that economic activities would resume in earnest, thereby helping to lift oil prices further. The increase in oil prices above Nigeria's budget benchmark of $40 per barrel would help shore up reserves, reduce currency pressure and increase the government's revenue (although the country's fiscal breakeven oil price is around US$133 per barrel). Analysts note that the possibility of a sustained rise in oil price with minimal constraints on output presents an opportunity for the economy to muscle forward.
Therefore, a sustained rise in the price of oil would likely reduce the burden of stagflation but conversely, however, an increase in the spread of the coronavirus, with a slowdown in inoculation, a rise in insecurity, and a fall in the price of oil would put the CBN in a grotto of having to sequence managing inflation and unemployment. If there is an increase in the cases of coronavirus and a slowdown in inoculation, the CBN's policy options become narrower and would see the CBN double down into its development finance role (see illustration 2 below).
Illustration 2: MPC Outlook; Quenching Stagflation flames
Given the volatile nature of the oil market and the need to expand the countryâ€™s revenue base, economists advise that administrators embark on economically viable and value-adding projects like African counterparts such as Uganda which is building a honey factory capable of employing about 4,000 workers, Ghana has stopped the export of cocoa to Switzerland to take advantage of the domestic value chain. Policy analysts have observed that rather than spend scarce resources on the rehabilitation of the Portharcourt petroleum refinery, the country should concentrate on strengthening domestic manufacturing value chains by improving energy infrastructure and road networks with a reinforcement of the local security architecture.