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The decision by Nigeria’s central bank to raise the main policy interest rate sharply in May does not signal a fundamental shift in the country’s unorthodox monetary policy, which will continue to impede efforts to rein in inflation, says Fitch Ratings.
At the monetary policy committee meeting of the apex bank, the benchmark interest rate was jerked up by 150 basis points to 13% in a move to combat the biting headline inflation rate after two years of a dovish stance that kept rates at 11.50%.
In a commentary released on Thursday, the global rating firm analysts said they believe Nigeria’s complex policy approach will be maintained at least until the next presidential election in February 2023.
It said a significant strengthening of macroeconomic performance appears unlikely in the near term, despite the supportive effects of higher global oil prices for the economy. Fitch said the Russia-Ukraine war’s impact on global prices, notably for food and energy, has seen inflation accelerate in 2022.
Recalls that consumer prices rose 17.7% year on year in May, up from last year’s low of 15.4% in November. Fitch now forecasts Nigeria’s inflation to average 17% in 2022, unchanged from the 2021 average.
In March 2022, Fitch had predicted inflation this year would average 14.6%. The rating firm explained that the Nigerian authorities had planned to phase out fuel subsidies in 2022, but they are now unlikely to be removed before 2023.
This helps to contain 2022 inflation, but the cost of the subsidy – borne by the Nigerian National Petroleum Corporation (NNPC) – has reduced NNPC transfers to government.
“As a result, we forecast the general government deficit to narrow only moderately to 3.4% of GDP this year, from 4.2% in 2021”.
Fitch said it had expected at least one interest-rate hike in 2022, but the 150 basis points increase in the main policy rate, to 13%, on 24 May was larger than what its analysts had anticipated.
It noted that further increases are possible, as officials with the Central Bank of Nigeria (CBN) have indicated a preference for real interest rates to be less steeply negative. Moreover, Fitch expressed the view that the apex bank will use the Cash Reserve Ratio and the issuance of CBN special bills to tighten liquidity.
“The CBN is using these discretionary measures to inject or withdraw liquidity from the financial system, as well as influencing borrowing costs for specific sectors through various loan guarantees and direct support facilities.
“This has made monetary policy difficult to gauge and created a segmented interest-rate environment, impeding the transmission of monetary policy. The CBN adopted the Investor and Exporter (IEFX) window as the official exchange rate in May 2021. However, it continues to use administrative controls to manage the demand for foreign exchange, which has caused economically damaging shortages”.
Fitch said the Nigerian central bank’s inflation-fighting efforts have been complicated further by its lending to the federal government. IMF figures show that the CBN’s net claims on the central government rose by roughly 23% year on year in January 2022.
CBN officials have suggested that raising policy interest rates could moderate the Nigerian government’s domestic borrowing. However, the interbank treasury bills’ true yield remains low, at 3.9% for three-month bills at the end of May, albeit up from 3.3% in April.
Persistently high inflation is a key macroeconomic weakness, contributing to Nigeria’s relatively modest growth rates and weighing on external liquidity by discouraging financial account inflows.
Fitch forecasts Nigeria’s growth at 3.1% in 2022, saying that high oil prices will lift oil receipts, which together with a post-pandemic recovery in activity should support non-oil sector growth.
Still, high inflation this year will dampen growth by eroding consumer and business purchasing power. The oil sector’s inability to raise production will provide a further obstacle to higher growth.
Oil production slipped to 1.26 million barrels per day (bpd) in May 2022, from an average of 1.38 million bpd in the first quarter of 2022, according to the rating agency. #CBN Rate Hike Not Signal for Shift in Unorthodox Monetary Policy -Fitch
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