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The first three months of the year saw the Central Bank of Nigeria (CBN) having mixed results in its ongoing battle to curb inflation and bolster the naira, writes Tony Chukwunyem

When, on January 19, the Central Bank of Nigeria (CBN) released the 2024 meeting calendar for its Monetary Policy Committee (MPC), which showed that the apex bank planned to hold six MPC meetings in total this year beginning from its first meeting on February 26 and 27, analysts must have heaved a sigh of relief. Reason: in the wake of the ouster of the former Governor of the CBN, Godwin Emefiele, along with the termination of the appointment of the members of the MPC, which he led, the committee had not held another meeting since the one it held in July last year. Also, many financial experts believed that this (absence of the MPC) contributed to the CBN’s lack of success in taming inflation and ensuring exchange rate stability towards the end of last year.

Cardoso’s pledge

However, the new Governor of the CBN , Olayemi Cardoso, had argued in his keynote address at the Chartered Institute of Bankers of Nigeria’s (CIBN) 58th Annual Bankers’ Dinner, held in Lagos on November 24, last year, that despite the MPC not meeting, the apex bank was continuing with efforts to tackle inflation and exchange rate instability. He said: “The Central Bank of Nigeria is committed to achieving monetary and price stability. This is not just a technical objective, but it has real-life implications for the wellbeing of our citizens. Through targeted policies, transparent market operations, and coordination between monetary and fiscal authorities, we can ensure a more stable exchange rate, control inflation, and create an enabling environment for businesses and individuals to thrive.” He further said: “The primary mandate of the CBN is to ensure price stability, in addition to other objectives such as issuing legal tender currency, safeguarding external reserves, promoting a sound financial system, and providing economic and financial advice to the government. In line with our strategy to refocus on our core mandate, the CBN will discontinue direct quasi-fiscal interventionist activities and instead utilize orthodox monetary policy tools for implementing monetary policy. “As part of this refocus, the CBN has just approved the adoption of an explicit inflation-targeting framework to enhance the effectiveness of our monetary policy. The details and requirements for this framework are currently being finalized alongside the fiscal authorities. Additionally, the CBN will provide forward guidance, enhance transparency, and maintain effective communication with the public to anchor expectations and build trust among stakeholders.”

NESG economic outlook address

Indeed, in his address at the 2024 macroeconomic outlook launch hosted by the Nigeria Economic Summit Group (NESG) in Lagos on January 24, Cardoso disclosed that the CBN was aiming at an inflation rate of 21.4 per cent this year. He stated: “Inflationary pressures are expected to decline in 2024 due to the CBN’s inflation-targeting policy, which aims to rein in inflation to 21.4 per cent. This will be aided by improved agricultural productivity and the easing of global supply chain pressures, benefiting businesses by boosting consumer confidence and purchasing power.” According to the CBN Governor, “the outlook for decreasing inflation in 2024 will have a profound impact on businesses, providing a more predictable cost environment and potentially leading to lowered policy rates, stimulating investment, fueling growth, and creating job opportunities.” He announced that as part of efforts to ensure sustainable economic growth for the country, the CBN had reverted to the conventional monetary policy approach with a focus on attaining price stability.

Surging inflation

Still, analysts were taken aback by the National Bureau of Statistics’ (NBS) January 2024 Consumer Price Index (CPI) and inflation report. Although many analysts had generally expected the report to show that the country’s inflation rate was maintaining its upward trend, the Bureau’s official numbers surpassed their projections. For instance, while Financial Derivatives Company (FDC) projected that headline inflation was likely to rise to 29.73 per cent in January 2024, the NBS stated that prices rose by 0.98 per cent to 29.90 per cent compared with 28.92 percent in December. That meant that Nigeria’s inflation rate had been steadily heading north since January 2023. Thus, ahead of the MPC’s first meeting of the year, the consensus among analysts was that, in its bid to curb inflation, the committee was likely to sustain the tightening which it commenced in May 2022. For example, reacting to the NBS’ January inflation report, Coronation Merchant Bank stated: “Inflation continues to be driven by structural issues such as high logistic costs, poor infrastructure, storage issues, exchange rate pressure, elevated cost of PMS as well as insecurity (especially in food-producing areas). “The first MPC meeting under the tenure of the new CBN Governor, has been scheduled for the 26th and 27th of February 2024. The CBN plans to hold six meetings in 2024. We expect a rate hike at the upcoming MPC meeting. “We expect inflation to remain elevated in Q1 2024, followed by modest declines on the back of positive base effects and restrictive monetary policies.”

Outcome of MPC’s

February meeting However, most analysts did not expect that the committee would take tackle the key issues of rising inflation and naira weakness, by taking the drastic step of hiking the benchmark interest rate- the Monetary Policy Rate (MPR) by a substantial +400 bps to 22.75% from 18.75%- the highest level recorded since 2006- and increasing the Cash Reserve Ratio (CRR)

Traders attributed the naira’s significant appreciation in the official market penultimate week to the CBN’s forex reforms, especially its increased sale of dollars

from 32.5 per cent to 45.0 per cent. The general reaction to the MPC’s decisions was that they will not curb inflation in the short term and could hurt economic growth. For instance, in its reaction, Comercio Partners, said that the MPC’s decisions were likely to impose greater strain on economic activities and could “exacerbate the unemployment issue confronting the Nigerian economy.” According to the firm, while the MPC’s decisions reiterate the CBN’s commitment to maintain price stability, the apex bank should, “have taken a more subtle approach in its fight against inflation, “given that recent data on inflation, unemployment, and Gross Domestic Product (GDP), shows signs of weaknesses in the economy.” The firm stated: “The CBN’s move to hike interest rate by 400bps, putting the MPR figure at 22.75 percent, is expected to cause increased strain on the economy, especially businesses. The country, despite its resilience, might not have enough room to contain the latest hike in interest rates. “The economy, which currently faces a series of fluctuating social and economic challenges, may be pushed further into devastation as an increase in the minimum cost of borrowing in the economy may likely cause a slowdown in the corporate sector, leading to a decline in the stock market. “Also, with this move, it is expected that the fixed-income space may see a sell-off as an increased interest rate makes old fixed income securities unattractive, causing a fall in their prices and accompanied by increased yield. It is also expected that new issues both in the public and private spaces will attract higher yields. “Lastly, on the macroeconomic front, despite the increased interest rate likely to cause a slowdown in GDP growth and stock appreciation, the move may exacerbate the unemployment issue confronting the Nigerian economy. Although doubtful, we may see some degree of easing in the inflation figures before the end of the year.”

February inflation data

In line with analysts’ expectations, the February inflation report released by the NBS on March 15, showed that the annual inflation rate rose to 31.70 per cent in February from 29.90 per cent in January. The report said that on a month-on month basis, headline inflation increased by +48bps to 3.12 per cent compared with 2.64 per cent recorded in the previous month, adding that the food inflation rate in February increased to 37.92 per cent on a year-on-year basis, which was 13.57 per cent points higher than the rate recorded in February 2023 (24.35 per cent). The NBS attributed the rise in annual rate of food inflation to increased prices of bread and cereals, potatoes, yam and other tubers, fish, oil and fat, meat, fruit, coffee, tea, and cocoa.

Naira rebounds

Interestingly, while the CBN’s measures have not started reining in inflation, their impact was beginning to be felt in the foreign exchange market with the result that the naira, which had fallen to a record low of about N1,800 per dollar at both the official and parallel FX markets, began to make a dramatic recovery in recent weeks. Specifically, the ailing local currency appreciated to N1,431/$1 on the official market on Friday, March 22, 2024, the best rate since February 5th when it closed at N1419.86/$1. Also, data obtained from the FMDQOTC, where the exchange rate is officially set, revealed that the naira gained 1.52 per cent at the close of business penultimate Friday, sustaining an upside momentum that started penultimate Friday, during which the local currency gained over 12 per cent. Traders attributed the naira’s significant appreciation in the official market penultimate week to the CBN’s forex reforms, especially its increased sale of dollars. Revocation of licences of 4,173 BDCs Some of the reforms, include: the unification of the foreign exchange market, removal of all limits on margins for IMTO remittances and broad reforms in the Bureau De Change(BDC) segment of the market, which resulted in the revocation of the operational licenses of 4,173 BDCs and resumption of forex sales to eligible BDCs. With improved liquidity in the official market, the naira also continued its recovery in the parallel market it strengthened to N1,280 per dollar last Friday compared with N1,500/$1 a fortnight ago.

Final settlement of forex backlog

However, analysts believe that a key factor that led to the naira’s recovery in the forex markets was the CBN’s recent announcement that it had concluded the payment of $1.5 billion to settle obligations to bank customers, effectively settling the residual balance of the FX backlog. According to the Acting Director, Corporate Communications Department at the apex bank, Mrs. Hakama Sidi-Ali, the move fulfilled a key pledge of the CBN Governor, Mr. Cardoso, “to process an inherited backlog of $7 billion in claims.”

MPC March meeting outcome

Clearly, the success the CBN was recording in the forex markets played a role in making all twelve members that attended the MPC’s meeting, last week, to vote to increase the MPR by 200 basis points to 24.75 per cent from 22.75 per cent in February; adjust the asymmetric corridor around the MPR to +100/-300 basis points; retain the CRR of Deposit Money Banks at 45.0 per cent and raise that of Merchant Banks from 10.0 per cent to 14.0 percent while leaving the Liquidity Ratio unchanged at 30.0 per cent. Responding to questions at the post MPC press conference on why the MPC was still hiking MPR even when this was not taming inflation, Cardoso expressed confidence in the efficacy of rate tightening. He was optimistic inflation will begin to moderate from May downward. He said: “The key thing for us as a central bank is to be fully focused on our core mandate. And that core mandate, basically, is to fight inflation and to ensure price stability. So there’s no ambiguity in that, and there’s no compromise on that. We are very, very concerned that the purchasing power of the average Nigerian should be restored to the levels that they know it to be. What we are saying is that, going forward, we expect that if the environment is such that it requires us to tighten, we will tighten our projections. However, there are indications that things will begin to moderate from about May onwards, and the projection, as you may know, is that by the end of the year, we’re expecting the inflationary rates to have come down significantly. “We believe that we are on the right course. One particular area as a result of the actions we are taking is the moderation in the foreign exchange rate which you have seen. Now, don’t take the foreign exchange in isolation because it does have a major pass through to inflation. And to the extent that we’ve seen this happen, and we expect it will continue to moderate. We are confident that these tools as measures that the central bank is using will ensure that you know the inflationary spiral will gradually be brought under stricter control.”

New capital base

However, apart from the CBN’s efforts to curb inflation and ensure exchange rate stability, other notable developments in the financial sector in the first quarter of the year, were the regulator’s sacking, in early January, of the boards of Union Bank, Polaris Bank and Keystone Bank, on the grounds of regulatory noncompliance, corporate governance failure, among other misdeeds and its announcement, last Friday, of new minimum capital requirements for the banking industry. According to the guidelines on the new banking sector recapitalisation Programme released by the CBN on Thursday, the new minimum capital base for commercial banks with international authorisation has been reviewed upwards to N500 billion from N50 billion. Also, the new minimum capital base for commercial banks with national authorisation was raised to N200 billion, while the new requirement for those with regional authorization was increased to N50 billion. Similarly, the new minimum capital for merchant banks was raised to N50 billion, while the new requirements for non-interest banks with national and regional authorisations were increased to N20 billion and N10 billion, respectively. The guidelines emphasized that all banks are required to meet the minimum capital requirement within 24 months commencing from April 1, 2024, and terminating on March 31, 2026.

Conclusion

The consensus among industry stakeholders, over the weekend, however, was that the CBN’s main focus in the short to medium term would continue to be on curbing inflation and ensuring exchange rate stability.