As widely predicted, inflation maintained an upward trajectory in Q1’21 as the Central Bank of Nigeria (CBN) held its accommodative monetary stance and intervention policies to spur economic growth, writes TONY CHUKWUNYEM
Unveiling the apex bank’s policy direction for 2021 in his address at the Annual Bankers’ Dinner organised by the Chartered Institute of Bankers of Nigeria (CIBN), held on November 27 last year, Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, had disclosed that the regulator did not intend to change its stance with regard to its measures to boost economic growth (the economy had slid into recession due to COVID-19 crisis), even though inflation had been rising since September 2019.
Monetary factors not cause of inflation
Emefiele stated: “Our actions in 2021 would be guided by the considerations that emerged from the Monetary Policy Committee meeting of November 23 & 24, 2020, which sought to address the major headwinds exerting downward pressure on output growth and upward pressure on domestic prices.
“Given the fact that the rise in inflation is not due to monetary factors but rather the prevalence of structural rigidities and supply shocks, traditional tools of monetary policy may not be helpful in addressing current inflationary pressures. Rather, a more useful policy will be the supply-side measures implemented by the bank.
As a result, emphasis will be placed on strengthening the development finance initiatives of the CBN in order to stimulate greater production and reduce unemployment.”
Specifically, the CBN governor said that in 2021, the regulator planned to increase its support for measures that will aid improved cultivation of local produce in the country, “with particularly emphasis on improving our yield levels, as food inflation continues to remain the key driver of inflationary trends.”
Maintaining status quo
Thus, although inflation increased by 15.75 per cent (year-onyear) in December 2020, the highest rate recorded in three years, the CBN’s Monetary Policy Committee (MPC), at its first meeting of 2021 in January, left the key Monetary Policy Rate(MPR) unchanged at 11.5 per cent.
It also retained the asymmetric corridor of +100/-700 basis points around the MPR while the Cash Reserve Ratio (CRR) and liquidity ratio were left at 27.5 per cent and 30 per cent respectively. Emefiele had told journalists at the end of the MPC meeting that the committee supported the CBN sticking to its stance of systematic synchronization of monetary and fiscal policy accommodation through the apex bank’s developmental finance initiatives.
He said: “Although the economy is currently in a stagflation environment with simultaneous occurrence of inflationary pressures and contracting output, the MPC resolved to reverse both developments and continue pursuing price stability in growing the economy.”
He pointed out that the MPC’s position was that an aggressive expansionary stance could worsen both inflation and the negative real interest rate, thereby affecting the exchange rate negatively.
The CBN governor gave a similar reason for the MPC’s decision to leave rates unchanged at its meeting in March despite the fact that inflation increased to 16.47 per cent and 17.33 per cent in January and February respectively.
In fact, throwing light on the inflation issue in the address he delivered at the major economic summit organised by the Bankers’ Committee in Lagos, on February 26, 2021, Emefiele said: “On inflation, we note that the general price level in 2020 have responded to several shocks including disruption to global and domestic supply chains as a result of COVID-19, energy price adjustments, supply/logistic bottlenecks reflecting insecurity in many parts of the country, the adjustments in the exchange rate, which has made imports more expensive. To this end, headline Inflation rose from 12.26 per cent in March 2020 to 16.47 per cent in January 2021.
“The rise in inflation along with the need to implement growth enhancing measures, that would enable the Nigerian economy to emerge from the recession, continues to pose a dilemma for policy making authorities. Research conducted by the CBN notes that the rise in inflation has been due to cost-push factors rather than demand pull factors.
As a result, the CBN has placed greater weight on utilizing tools that would address the shocks to economic growth, while at the same time helping to provide facilities that can reduce the cost-push factors in inflation.”
Accommodative monetary policy
Stressing that the CBN would, this year, continue to provide accommodative monetary policy measures that will enable faster recovery of the economy, through improved flow of credit to key sectors of the economy, he said: “While accommodative monetary policy measures that will support growth remain paramount in our priorities for 2021, we would continue to pay attention to trends in inflation, as price stability is critical in guiding savings and investment decisions by households and businesses.”
‘Naira 4 dollar scheme’
Apart from rising inflation, the measures that the apex bank put in place to address the perennial issue of naira stability, were another major development of Q1’21. With the naira closing at a then record low of N410.25 at the Investors and Exporters’ (I&E) window on December 31 2020, speculation was rife in financial circles that the CBN was again planning to devalue the local currency after the last two devaluations of last year.
The devaluation speculation was further fuelled by concerns that the COVID-19 crisis could persist for the whole of 2021 and the attendant impact this would have on Nigeria’s economy, especially on the price of oil, the commodity that accounts for 90 per cent of the country’s forex earnings.
However, while the last three months had seen the naira dropping to N485 per dollar currently, from N478/$1 on the parallel market at the end of last year, the local currency has not plunged to the level that some analysts had predicted. Industry watchers attribute the naira’s relative stability against the dollar on the parallel market to the “naira 4 dollar scheme” introduced by the CBN early last month.
The scheme, which commenced on March 8, 2021, and end on May 8, 2021, sees the apex bank paying beneficiaries of diaspora remittances, who receive funds through licensed International Money Transfer Operators (IMTOs), N5 for every $1 received as remittances inflow.
According to the CBN, the initiative is aimed at checking round tripping and providing Nigerians in the Diaspora with cheaper and more convenient ways of sending remittances to their loved ones, friends and associates in the country.
More significantly, however, the scheme was also aimed at boosting remittance inflows into the country, thereby leading to an increase in the nation’s external reserves and enhancing exchange rate stability.
Restriction on crytocurrency exchanges
Clearly, however, the CBN’s policy that attracted the most attention in the last three months was the directive it issued in early February that financial and non-bank financial institutions in the country should identify and immediately close the accounts of individuals and firms transacting in, or operating crypto currency exchanges.
Although the CBN noted that the move was to help safeguard financial stability and that it had, through its two earlier circulars dated January 12, 2017 and February 27, 2018, barred all banks in the country from using, holding, trading and/or transacting in cryptocurrencies, the regulator came under attack from critics who accused it of wanting to worsen the nation’s already bad unemployment problem.
The CBN responded by citing countries that had completely banned crytocurrency transactions and also listing measures that it had taken to help make Nigeria’s fintech industry one of the most vibrant in the world.
Plan to ‘borrow’ dormant accounts funds, unclaimed dividends
Another equally controversial issue in the first quarter was the announcement by the Federal Government that following the commencement the new Finance Act 2020 from January 1, it could take over unclaimed dividends in a listed company and unutilised amounts in a dormant bank account outstanding for six years or more.
Although several stakeholder groups opposed the move and said they would take the government to court over the issue, it resulted in customers of banks rushing to reactivate their dormant and inactive accounts.
Okonjo-Iweala’s as WTO’s DG
Two-time former Finance Minister of Nigeria, Dr. Ngozi Okonjo- Iweala’s emergence in February as Director-General (D-G) of the World Trade Organisation (WTO), after a tough contest that had the former IS President, Donald Trump’s administration backing her opponent, was also, undoubtedly, one of the highlights of the last three months.
Indeed, Nigerians from all walks of life celebrated the fact that she became the first woman and first African to be appointed as WTO D-G. In a statement signed by his Senior Special Assistant (Media & Publicity), Garba Shehu, President Muhammadu Buhari said Dr. Okonjo-Iweala’s election as WTO D-G had brought joy and more honour to the country.
The statement said: “As the Harvard-educated and renowned economist takes up another onerous task of service to the world and humanity, the President believes her track record of integrity, diligence and passion for development will continue to yield positive results and rewards to mankind.
“President Buhari affirms that Dr. Okonjo-Iweala, who over the years set major records of economic reforms in Nigeria as minister of finance, and later minister of foreign affairs, will excel in her new position and validate the global mandate of repositioning and strengthening the multilateral institution for the greater good of all.”
As several analysts noted at the weekend, the announcement by the National Bureau of Statistics (NBS) in February that Nigeria recorded an early exit from recession with a growth of 0.11 per cent in Q4’20 seems to have helped to boost economic activities in Q1’21.