Market News

*Raises interest rate by another two per cent  

*Money supply defies hawkish stance, spikes by 79 per cent in one year 

*We are done with Binance saga, says Cardoso

*$2.4 billion unauthorised FX under investigation 
 

The Central Bank of Nigeria (CBN) leaves nobody in doubt about outward-looking posturing, which prioritises foreign capital inflow at the expense of the survival of local industries raising the monetary policy rate (MPR) by yet another two per cent to a multi-decade high of 24.75 per cent at the close of the Monetary Policy Committee’s (MPC) meeting yesterday.    

With the decision, the rate-setting arm of the Central Bank has raised the floor of cost of funds to nearly 25 per cent, a decision that could make commercial loans unaffordable to the private sector for project execution, including factory expansion, new plant building and machinery acquisition, in the short term.     

Already, experts have warned that the CBN’s renewed hawkish stance would raise the cost of production, a challenge most blamed for the country’s high inflation rate, which grew to well over 31 per cent a month. 

Whereas the cost of credit could spike in the short-term, continuous inflow of foreign capital could increase access to funds, thus reducing interest rate, leading to a firmer naira.

Whereas prices have remained sticky and rising in many cases, the CBN’s aggressive tightening and recent open market operation (OMO) have turned the foreign exchange (FX) into a buyer’s market and reined in the activities of currency speculators. Thus, the naira has continued to edge up with traders quoting as low as N1200/$ yesterday.

Dollar, which spiked to over N1900 last month, has been trading around N1300/$ since the beginning of the week.  The CBN, on Monday, announced the approval of the sale of FX to Bureau de Change (BDC) operators at N1251/$ to sell at not more than 1.5 per cent margin. The resumption of FX sales to retail traders is seen as a major milestone to breathe life into the ailing local currency. 

To sustain the modest gain in the efforts to save the naira, the Central Bank may need to pay attention to the uptick in money supply, a contradiction of the intention of the two-year monetary tightening.   

Since May 2022 when the MPC first threw the interest rate hiking dice, the money supply aggregate has ballooned by 97 per cent, from N48.5 trillion to N95.6 trillion as of February. But the last year has seen more aggressive growth, with the money broad money stock growing from N53.3 trillion to N95.6 trillion or 79.3 per cent year-on-year. 

Except confidence in the local economy increases significantly and economic agents begin to find more reasons to invest, rising money supply suggests naira still has much downside pressure. Building confidence, experts have suggested, would require a more serious approach to dealing with insecurity and addressing other rigidities in the economy.        

Speaking at the end of the 294th MPC meeting in Abuja yesterday, the CBN Governor, Yemi Cardoso, also announced a change in the asymmetric corridor from +100/-700 to +100/-300. This has raised the discount on deposits by commercial banks with the apex bank through the discount window, which means banks have a higher incentive to excess liquidity at CBN rather than funding risky private sector projects.   

However, it retained the cash reserve ratio (CRR) of commercial banks at 45 per cent while the CRR of Merchant banks changed from 10 per cent to 14 per cent.

It also held the liquidity ratio constant at 30 per cent. On the fate of Binance, a cryptocurrency exchange platform accused of manipulating naira, Cardoso said: “We have done our bit on Binance, not our problem anymore. Regulation of Binance sits with the Security Exchange Commission (SEC).  He hinted that law enforcement authorities are currently investigating $2.4 billion worth of unauthorised foreign exchange transactions.  

The investigation focuses on numerous transactions that did not adhere to the regulatory standards established by the CBN for FX allocations, he said during a media briefing.   

Cardoso highlighted various irregularities, such as the disbursement of large sums of FX for requests that were never submitted and allocations made without the necessary naira backing.  

  

He said: “We determine that a number of these transactions did not qualify. In some cases, we have some allocations made in millions of dollars, which were never requested; we also had somewhere they had no naira and they were also allocated some foreign exchange.    

“It was for that reason that we refused to validate those particular transactions. Apart from the fact that documentation was not satisfactory, in many cases, they were outright illegal. The law enforcement agencies are now looking into those transactions that as far as we are concerned, are not valid to be paid.”  

On the claims that the FX backlogs owed to the aviation sector and other stakeholders have not been fully cleared, Cardoso explained: “There may be some stakeholders who over some time may have backlogs. We have done what we can to make the market as transparent and as liquid as possible. Those particular stakeholders are free to assess the market to take care of their backlog but we have met all the verified backlogs of contractual obligations as we deem them forward transactions.”

On whether the fertilisers given to the Ministry of Agriculture symbolise a return to direct intervention by the apex bank, Cardoso declared that there was no contradiction and that the bank will not go back to direct interventions that are outside of its core mandate.  

However, he explained that the bank will continue to partner with agencies in relevant sectors, not only in deploying financial and other assistance but also in capacity building in helping agencies deliver on their mandates. An economist, Ayo Teriba, said the MPC is sacrificing real output and demand growth on the altar of exchange rate stability.    

“They are forced into the dire trade-off by the fact of foreign reserve inadequacy. The sustainability of that strategy remains to be seen .   

“Reserve adequacy must be achieved to avoid such trade-offs and deliver simultaneous growth and stability sustainably,” he said.Professor of Economics, Olabisi Onabanjo University, Ago-Iwoye, Ogun State, Sheriffdeen Tella, said the decision was not a good step in the right direction.

According to him, the hike would compel banks to raise their lending rate, which would ultimately increase the cost of borrowing.He said when the cost of borrowing skyrockets, it would increase input costs and weaken the demand for manufactured goods.  

“It is wrong for the CBN to think that there is too much money in circulation. The money is not in the hands of the public but with few individuals who use the money to do other businesses, especially in the foreign exchange market.   

“It is surprising that they hike the rate again. With this, it will cost more for producers to borrow from banks and when the cost of production is high, it will be difficult to tame inflation,” he noted. 

Also, a former president of the Chartered Institute of Bankers of Nigeria (CIBN), Dr Uche Olowo, said the rate hike would hurt manufacturers, but described the decision as the ultimate measure to tackle inflation. 

A professor of finance at the University of Nigeria, Chuke Nwude, said fighting inflation and exchange rate with interest rate hikes is not enough because many causative factors are “pinning the Nigerian economy down structurally”.  He wondered why the government has failed to fix the refineries, which are currently worsening the issue of the FX crisis. He pointed out that the country would not record any meaningful growth if it continued to engage in fuel products importation.