Analysis: Waiting For MPC, MoF For Improved Living Standards

As the nation awaits with bated breadth the outcome of the Monetary Policy Committee (MPC) meeting today, indications have emerged that rising inflation, unemployment and multiple exchange rates, among others dominated the discussions at the two day meeting.
While we expect a further build up in inflationary pressures in the coming months largely due to the persistent increase in the price of fuel and exchange rate pressures as well as recent upsurge in ways and means funding of the federal government by CBN , unemployment scourge will continue to inflict on the people as Covid-19 pandemic and activities of bandits and herdsmen have made employers to downsize while farmers have stopped going to their farms.

Specifically, the outlook for Nigeria’s economy seems bleak considering the implications of the negative data churned out by the National Bureau of Statistics (NBS) in the last couple of days and unless policymakers step up measures to ameliorate the situation.
For instance, last week and in quick succession, the statistics bureau released the unemployment and inflation rates on Monday and Tuesday respectively, with the trend showing an uptrend in both data.
The nation’s unemployment rate stood at 33.3 percent in the fourth quarter of 2020, up from 27.1 percent in the second quarter of last year. There was no data production for the third quarter of last year.

Indeed, the increase in PMS price has become inevitable, as the global price of oil increased by 57.41% to $68pb from the average of $43.2pb in 2020. This, coupled with the increase in food prices and the electricity tariff hike would push inflation above 17% in the coming months, according to some analysts.

Also, consumer disposable income is underwater and there is the high risk of widespread protest as people could push back on these reforms

More importantly is the fact that the Misery Index at 50.6 percent may further worsen to trigger Poverty, Crime and other societal vices.

Unsurprisingly, economic growth remains uninspiring, given household consumption makes up c.60.0 percent GDP.
Looking ahead, we see little respite for Nigerian consumers. While we believe that increased economic activity will marginally improve household income, cost pressures on household consumer baskets will dampen any growth.

Also, the committee will need to come to terms with the fact that the absence of a
unified flexible exchange rate will continue to be a recipe for macroeconomic and monetary instability.

More worrisome is the seemingly lack of synergy between the monetary and fiscal policies and even within the monetary policy measures by the CBN.

While the bank continues to fund government’s deficit budgets through ways and means, this has become problematic to liquidity management by the bank. This is beside the crowding out effect on the private sector, which is supposed to be the driver of the nation’s economic growth.

Infact, while the MPC meeting was deliberating on appropriate monetary policy measures against these negative economic indicators and resolutions and in a move seen by some analysts as another round of devaluation of the local currency, the third within 12 months, Zainab Ahmed, Finance Minister says Nigeria is set to adopt a new flexible exchange-rate policy for her official transactions, according to Bloomberg, quoting the Minister.

The implication is that government will start to use the flexible rate, that has until now applied to investors and exporters, for government transactions too .

The Nafex, as the flexible rate is known, has averaged 410 naira to the dollar since the beginning of the year.

This is against the Central Bank of Nigeria’s old fixed rate of 379 naira, a development analysts say, amount to devaluation.

“Within the government and the central bank, there is only one official rate and that’s the Nafex rate,” Ahmed said.

Some analysts were of the opinion that the policy pronouncement by Ahmed should have been incorporated in the expected MPC decisions to be made public today.

Nigeria has devalued her currency twice since March last year. The adoption of the flexible-rate policy could assist discussions with the World Bank for a $1.5 billion loan that is partly conditional on currency reforms.

The Nafex rate was introduced in 2017 as a way of wooing foreign investors without formally devaluing the currency. Recently, investors have complained about dollar shortages, for which CBN has commenced clearing the backlog of demand estimated at about $2 billion in February.