Against the background of the devastating impact of the Ukraine war on the global economy, the decision by the Central Bank of Nigeria (CBN)’s Monetary Policy Committee (MPC), at its meeting in May, to raise the benchmark interest rate by 150 basis points to 13 per cent, its first hike in over two years, to combat rising inflation, was arguably one of the most significant developments in the financial sector in the first half of this year, writes TONY CHUKWUNYEM
Given that despite rising inflation, the Central Bank of Nigeria (CBN)’s Monetary Policy Committee (MPC) had voted to leave interest rates unchanged at its previous meetings in January and March this year, many analysts had expected members of the committee to vote in the same direction at their meeting in May. For instance, in a report published a few days before the MPC meeting, Bloomberg said analysts it spoke with were expecting CBN to be among five of eight major apex banks on the continent that would likely hold interest rates as part of measures “to shore up their sickly economies, even as inflation pressures build.” As the financial news agency put it, “the Central Bank of Nigeria (CBN)’s reconstituted Monetary Policy Committee (MPC ) will probably stick to its policy of only making adjustments to borrowing costs once the economy’s recovery is on a sustainable path. That should see it leave the benchmark interest rate steady for a 10th consecutive meeting, even as inflation has been ticking up this year. “Choked supply chains, partly due to Russia’s invasion of Ukraine, and surging diesel costs are placing upward price pressures on Africa’s largest economy. They are also hindering its recovery, as are security challenges in its northern food-growing regions and persistent oil production troubles.” It also quoted head of research at SBM Intelligence, Ikemesit Effiong, as saying that: “CBN has consistently maintained a dovish monetary stance in the face of structural and policy-induced headwinds, and if anything, the souring of the global macroeconomic environment will only incentivise it to double down on holding rates.”
Surprise rate hike
However, CBN surprised the analysts as it raised the benchmark interest rate — the Monetary Policy Rate (MPR) — by 150 basis points to 13 per cent, its first hike in over two years, citing the need to rein in rising inflation, which accelerated to 16.82 per cent in April, its highest in eight months. It was the biggest rate hike since July 2016 when the apex bank increased rates by 200 basis points. The meeting saw six members of MPC voting to increase the main lending rate by 150 basis points, four of them by 100 basis points and one, by 50 basis points.
CBN governor told journalists at the post-MPC press briefing that members of the committee “felt that tightening will help rein in inflation before it assumes a galloping trend.” According to him, “the committee decided to raise monetary policy rate for the first time in two and a half years to rein in the current rise in inflation as members were of the view that the continued uptrend may adversely impact growth.”
He further stated that “MPC feels that tightening would narrow the negative real interest rate margin, improve market sentiment and restore investor confidence. Equally, members believe tightening would moderate inflationary pressure pass-through to exchange rate depreciation and moderate the speed of capital flow reversal, provide incentives for foreign capital inflows and sustain remittances. “Lastly, tightening could moderate government domestic borrowing, as government debt servicing to revenue ratio increased significantly in recent times, threatening debt sustainability.” However, in a report released on June 30, one of the world’s big three credit rating agencies, Fitch Ratings, averred that the rate hike doesn’t signal a fundamental shift in the apex bank’s unconventional approach, which, according to the agency, “will continue to impede efforts to rein in inflation,” which rose to 17.71 per cent in May. It predicted that despite the rate hike: “Nigeria’s complex policy approach will be maintained at least until the next presidential election in February 2023.”
Pro-growth stance
Indeed, although it hiked the MPR by 150 basis points to 13 per cent in May, CBN generally stayed the course in H1’ 2022 with its pro-growth policies, especially its intervention schemes, which it believes are majorly responsible for the sixth consecutive quarter of real output expansion, following the economy’s exit from recession in 2020. In the communiqué it issued at the end of the MPC meeting in May, for instance, CBN stated: “According to the National Bureau of Statistics (NBS), Real Gross Domestic Product (GDP) grew by 3.11 per cent in the first quarter of 2022, compared with 3.98 per cent in the fourth quarter of 2021 and 0.51 per cent in the corresponding period of 2021. This is the sixth consecutive quarter of real output expansion, following the economy’s exit from recession in 2020.
This steady positive performance was driven largely by the growth in aggregate consumption, arising from the continued policy support at the onset of the pandemic and gradual recovery of aggregate demand.” Also, to buttress the point that its intervention programmes are driving economic recovery, CBN has, in recent times, ensured that all MPC communiqués always give detailed updates on disbursements under the intervention schemes. For instance, the MPC’s May communiqué stated: “The Committee reviewed the performance of the Bank’s intervention schemes targeted at stimulating productivity in agriculture; manufacturing/industries; energy/ infrastructure; healthcare; exports; and micro, small and medium enterprises (MSMEs).
“Between April and May 2022, the Bank released the sum of N57.91 billion under the Anchor Borrowers’ Programme (ABP) to 185,972 new projects for the cultivation of rice, wheat, and maize,bringing the cumulative disbursement under the Programme to N1.01 trillion, disbursed to over 4.2 million smallholder farmers cultivating 21 commodities across the country.
“The bank further disbursed the sum of N1.50 billion, under the Accelerated Agriculture Development Scheme (AADS), to one new youth-led project, piloted and funded through the Government of Ondo State for the acquisition of assets for oilpalm cultivation and the establishment of poultry farms. This brings the total disbursement under the scheme to N21.23 billion for 10 state-led and three private sector-led projects.
“In addition, the bank released N21.73 billion to finance seven large-scale agricultural projects under the Commercial Agriculture Credit Scheme (CACS). The funds were utilized for the establishment of a ranch and milk processing facility; procurement of feed and medication for livestock/dairy production; construction of a 300 metrictonne per day oil mill in Gusau, Zamfara State; acquisition and installation of an agrochemical factory; as well as purchase and stockpiling of homegrown maize for animal feed production. “This brings the cumulative disbursement under this scheme to N741.05 billion for 674 projects in agro-production and agroprocessing. Under the Paddy Aggregation Scheme (PAS), N6.20 billion was disbursed by the Bank to three new projects for the purchase and mopping-up of home-grown rice paddy. This brings the total funds disbursed to 42 integrated rice millers under the PAS to N106.39 billion.” It further said: “To support the growth of the manufacturing sector, the bank disbursed the sum of N436.85 billion to 34 new projects under the N1.0 trillion Real Sector Support Facility (RSSF). This was utilised for both greenfield (new) and brownfield (expansion) projects under the COVID-19 Intervention for the Manufacturing Sector (CIMS) and the Real Sector Support Facility from Differentiated Cash Reserve Requirement (RSSF-DCRR). Cumulative disbursement under the RSSF for the financing of 402 real sector projects across the country currently stands at N2.10 trillion.”
IMF, World Bank revised growth forecasts
That the economy is on a steady recovery path could perhaps be seen from the fact that in the first half of the year, the International Monetary Fund and the World Bank revised upwards their growth forecasts for Nigeria. Specifically, in its April World Economic Outlook (WEO), IMF raised its growth forecast for the Nigerian economy in 2022 to 3.4 per cent from its earlier projection of 2.7 per cent in January. The Fund also revised up its growth forecast for the country in 2023 to 3.1 per cent from the 2.7 per cent it predicted in January.
“Nigeria’s growth outlook has improved through higher oil prices and a stronger-than-anticipated recovery of manufacturing and agriculture. Growth is expected to reach 3.4 per cent in 2022, falling back to 2.9 per cent from 2024 onwards. The outlook is subject to high uncertainty associated with oil prices and financial conditions.
“Moreover, low vaccination rates, rising security risks and elevated price pressures weigh negatively on the medium-term growth outlook. Diversification away from oil will be critical to raise growth potential sustainably and reduce volatility,” the Fund stated. Similarly, in its latest Global Economic Prospects report, the World Bank, citing high oil prices, further recovery in agriculture and manufacturing as well as key structural reforms such as the Petroleum Industry Act (PIA), raised its 2022 growth forecast for Nigeria to 3.4 per cent from the 2.5 per cent it projected for the country in January. The bank also raised its growth forecast for the country in 2023 to 3.2 per cent from the 2.8 per cent it forecast in January.
RT200 FX Programme
However, given that Nigeria’s economy is heavily dependent
RT200 FX Programme
However, given that Nigeria’s economy is heavily dependent on importation, the country’s external reserves were under pressure throughout the first half of the year despite high oil prices, thereby making it difficult for CBN to effectively defend the country’s currency. Thus, as part of its measures to help reduce the nation’s dependence on crude oil exprts and to earn more stable inflows, CBN, on February 10, unveiled another intervention scheme codenamed “Race to $200 billion in FX Repatriation (RT200 FX Programme).” Shedding light on the scheme during the Bankers’ Committee meeting held in February, CBN Governor, Godwin Emefiele, said the initiative consisted of a set of policies, plans and programmes for non-oil exports, which would help the country attain its goal of $200 billion in FX repatriation, exclusively from non-oil export transactions over the next three to five years. He explained that the new initiative would have five key anchors namely: Value-adding exports facility; non-oil commodities expansion facility; non-oil FX rebate scheme; dedicated non-oil export terminal, as well as a biannual non-oil export summit.
Conclusion
With no end in sight to the Russia-Ukraine war, analysts predict that inflationary pressures and inadequate forex would continue to be CBN’s major challenges in the remaining months of the year.