In his address at the 2024 macro – economic outlook launch hosted by the Nigeria Economic Summit Group (NESG) in Lagos on January 24, Governor of the Central Bank of Nigeria (CBN), Olayemi Cardoso, who assumed office in September last year, announced that the apex bank was aiming at an inflation rate of 21.4 per cent this year.

He said: “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.”

Cardoso also disclosed 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.

On CBN’s planned measures to address naira weakness, he said: “In our efforts to stabilize the exchange rate, it is imperative that we prioritize transparency and create a market environment that enables the fair determination of exchange rates, ensuring stability for businesses and individuals alike.

“We believe that the naira is currently undervalued and, coupled with coordinated measures on the fiscal side, we will expedite genuine price discovery in the near term. This coordinated approach will contribute to a more balanced and stable exchange rate.”

Given the foregoing and with data released by the National Bureau of Statistics (NBS) indicating that headline inflation rose by 0.98 per cent to 29.90 per cent in January, compared to 28.92 per cent in December, the first Monetary Policy Committee (MPC) meeting of the apex bank, which held on February 26 and 27-the first such meeting chaired by Cardoso- attracted more interest than usual.

Reason financial analysts and industry stakeholders were eager to see the amount of tightening that the CBN would adopt to curb inflation and stabilise the exchange rate.

MPC meeting

Still, a lot of analysts seemed to have been taken aback by the MPC’s decision at that meeting to hike the benchmark interest rate- the Monetary Policy Rate (MPR) by a substantial +400bps to 22.75 per cent from 18.75 per cent-the highest level recorded since 2006- and increase the Cash Reserve Ratio (CRR) from 32.5 per cent to 45.0 per cent.

In the analysts’ view, the tough measures were not likely to 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.”

The firm argued that 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.”

As the firm put it, “the CBN’s move to hike interest rate by 400bps, putting the MPR figure at 22.75 per cent, 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

Indeed, 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 monthon-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 yearon-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’s rebound

But while the CBN’s measures did not seem to be having the desired effect on 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, appreciated to N1,431/$1 on the official market on March 22, 2024.

Revocation of licences

Traders attributed the naira’s significant appreciation in the official market to the CBN’s forex reforms, which included: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, that resulted in the revo – cation of the operational licenses of 4,173 BDCs and resumption of forex sales to eligible BDCs.

Forex backlog

However, analysts believe that a key factor that led to the naira’s recovery in the forex markets was the CBN’s announcement, on March 20, 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

The success the CBN was recording in the forex markets clearly played a role in making all twelve members that attended the MPC’s meeting in March 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 press conference, held after that meeting, on why the MPC was still hiking MPR even when this did not seem to be stemming inflation, Cardoso expressed confidence in the efficacy of rate tightening.

He was optimistic inflation would 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.”

Cardoso further stated: “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.

”Recapitalisation programme

Apart from the CBN’s efforts to curb inflation and ensure exchange rate stability, however, there were other notable developments in the financial sector in the first half of the year.

Among these developments were the regulator’s sacking, in early January, of the boards of Union Bank, Polaris Bank and Keystone Bank, on the grounds of regulatory non-compliance, corporate governance failure, among other misdeeds and its release on March 28 of the guidelines on the new Banking Sector Recapitalisation Programme.

The guidelines showed that the regulator had reviewed the new minimum capital base for commercial banks with international authorisation 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.

MPC meeting in May

With data from the NBS showing that the inflation rate climbed to 33.69 per cent in April 2024, up from 33.20 per cent in March, the consensus among analysts was that the MPC will again hike the MPR at its meeting in May.

Indeed, the meeting saw the MPC incresaing the MPR by 150 basis points to 26.25 per cent from 24.75 per cent. It however, retained the CRR of DMBs at 45 per cent and put the Asymmetric corridor around the MPR at +100 and –300 basis points.

The bank also left the liquidity ratio of banks at 30 per cent. Speaking at a press conference at the end of the meeting, Cardoso said the MPC ‘s decisions were based on its belief that the CBN’s anti -inflation measures were working.

He said: “Following an extensive review of risks and the near-term inflation outlook, the balance of risks suggests further tightening of policy to build on the benefits accrue from previous rate hikes.

“In terms of looking at the inflationary figure over the past year, inflation is indeed getting more and more of an issue.

However, I think there is light at the end of the tunnel, and that is because as much as we see an increase in the inflationary figures when you go down to the specifics in terms of food, core and headline, you’ll see that it is moderating and decelerating in increment, and that’s the good news.

Conclusion

As analysts pointed over the weekend, Cardoso’s optimism about inflation easing could be justified, given that in its revised Global Economic Outlook for 2024 released in April, the International Monetary Fund (IMF) projected that Nigeria’s inflation rate will drop to 26.3 per cent this year.

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