Nigeria’s central bank likely to retain interest rates at 11% despite rise in inflation

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) meets today and tomorrow. It would review economic and monetary developments since its last meeting in January where it held interest rates at 11 percent.

Since the last meeting, inflation has risen to 11.4 percent and the naira has failed to strengthen against the dollar, exchanging at N320 to a dollar on the parallel market, while the CBN has continued to hold the official exchange rate at N197. These conditions coupled following a growth of 2.1 percent in Q4 2015, the slowest since Q1 2010 (largely due to lower oil production) will put the MPC on its toes as it deliberates on exchange rate management, interest rate restructuring and liquidity management strategies. Followers of the Nigerian economic space would expect a policy response from the CBN, particularly due to the sharp rise in the inflation rate.

Mark Bohlund, Sub-Saharan Africa and Middle East Economist, Bloomberg Intelligence, in an interview with The Nerve Africa predicts the outcome of the CBN’s MPC meeting.

On inflation and interest rates

The sharp increase in inflation in February warrants a response from an inflation-targeting central bank. However, the Central Bank of Nigeria appears restricted in its independence vis-a-vis the presidency. The weak growth reading also motivates a looser monetary policy as domestic demand is clearly suffering from the reduction in oil revenue being injected into the economy. Overall I think it is likely that the CBN will stay on hold at 11.00 percent.

Devaluation?

Nigeria has nothing to gain from a devaluation as it is not an exporting economy, President Buhari has stated. However, Nigeria does not need to export to become rich as it has a large enough market to allow local firms to benefit from specialization and economics of scale (as Dangote) currently is.

While Nigerian wages are low from a global perspective the wealth of constraints domestic companies are already battling with (infrastructure, power, regulation) mean that they are currently not cost competitive and the government is currently adding to these constraints with its FX regime and comments of more government control of bank lending and other decisions normally left to private actors in the market.

This command-style economic system did not work well in the Soviet Union and there is no reason to expect it to work better in Nigeria. The Nigerian government should let the markets decided which economic activities are viable in Nigeria while seeking to remove constraints in infrastructure and other areas.

An improvement towards global competitiveness in product areas where Nigeria is currently heavily import dependent is through allowing the Naira to weaken.

The right move

Some protective trade barriers can be motivated but they need to be chosen in areas where comparative strengths have been identified and support an improvement in productivity growth towards global levels.

Apart from cement, I think this will in practice mean agricultural, where Nigeria should be able to become self-sufficient in a number of goods. There has been positive examples under former agricultural minister [Akinwumi] Adesina and more recently with the tomato paste plant opened by [Aliko] Dangote. While this may not be sufficient to prevent a drop in living standards it will be more sustainable than the oil-fueled economic boom over the past decade.