Of Monetary Policy Direction and Current Realities

Nume Ekeghe writes on President Bola Tinubu’s monetary policy direction as stated in his inaugural speech, the possibility of attaining his set out goals considering current economic realities

Last week, Nigeria marked the beginning of a new era as leadership transitioned from one government to another. Muhammadu Buhari passed on the baton of leadership to Bola Ahmed Tinubu. However, the focus shifted away from the transition itself, as Presid            ent Tinubu’s inaugural speech unveiled crucial policy changes.

In addition to mentioning the removal of fuel subsidy, President Tinubu raised significant concerns regarding monetary policy. He provided insights into how his administration plans to handle monetary matters, emphasising the need for an economic overhaul. His goals include achieving higher GDP growth and substantially reducing unemployment in the country.

The president proposed accomplishing these objectives through budgetary reform, aiming to stimulate the economy without causing inflation. Furthermore, he intends to implement an industrial policy that utilizes various fiscal measures to promote domestic manufacturing and reduce dependence on imports.

Exchange Rates

Speaking on monetary policy, the president stressed the need for “thorough house cleaning,” saying the central bank must work towards a unified exchange rate. Currently, the naira is selling at N760 to the dollar at the parallel market while it closed at N464.67 at the Investors’ and Exporters’ window recently. Whilst the apex bank had maintained its stance on a managed float of the currency amidst multiple exchange rates, Tinubu in his inaugural speech said harmonising exchange rates in the country, “will direct funds away from arbitrage into meaningful investment in the plant, equipment and jobs that power the real economy.”

Achieving exchange rate harmonisation, experts said, can be a complex and challenging task.

“It would require a comprehensive approach and careful consideration of various economic factors, including fiscal stability, monetary policy, balance of payments, and external competitiveness. It would entail macroeconomic stability with low inflation, sound fiscal policies, and strong monetary discipline. These factors are crucial for maintaining the credibility of a unified exchange rate.

“Also, transitioning from a managed float exchange system to exchange rate harmonisation involves shifting from a more interventionist approach to one that allows market forces to play a significant role in determining the exchange rate. This shift may require adjustments to monetary policy frameworks and the development of deep and liquid foreign exchange markets, “said a market analyst who do not want his name in print.

“Also, the CBN in the past had explained that external trade imbalances are a major factor, which caused the apex bank to restrict giving accessibility of foreign exchange to some items that can be produced here, which are adding to the pressure on the exchange rate. And so, there will be need for structural reforms, including promoting export competitiveness and reducing import dependency.

“It is important to note that the feasibility and success of exchange rate harmonisation depend on the specific economic conditions, policy priorities, and political dynamics of a country. Each country’s situation is unique, and the approach to exchange rate harmonization needs to be tailored accordingly, “he added.

Chief Executive of Center for the Promotion of Private Enterprise (CPPE) Dr Muda Yusuf, who welcomed the decision of the President to put in place a unified exchange rate regime, noted that it should be clarified that this is not a devaluation proposition.

He explained that it is a pricing mechanism that reflects the demand and supply fundamentals in the foreign exchange market which allows for rate adjustments as and when necessary.  It is a model that is predictable, transparent and sustainable.  It is a policy regime that would reduce uncertainty and inspire the confidence of investors.

He said “it is a policy framework that would minimize discretion and arbitrage in the foreign exchange allocation mechanism.”

According to him, a unified exchange rate regime offers the economy liquidity in the foreign exchange market, whilst reducing uncertainty and enhancing the confidence of investors. He explained further that a harmonised exchange rate is more transparent as mechanism for foreign exchnage allocation. “It minimizes discretion in the allocation of forex and reduces corruption vulnerabilities and reduces opportunities for round tripping and other sharp practices,” he said.

Yusuf noted that the current foreign exchange policy regime creates multiple exchange rates and resulted in distortions and negative outcomes such as the widening gap between the official and parallel market exchange rates which allows forex roundtripping to flourish.

Also, he said the multiple rates in the forex market has led to the collapse of liquidity in the foreign exchange market resulting in acute forex scarcity, whilst creating a major disincentive for forex inflows into the economy, thus suppressing forex supply.

Interest rate

On benchmark lending rates, the president stated that, “Interest rates need to be reduced to increase investment and consumer purchasing in ways that sustain the economy at a higher level.” The Monetary Policy Committee had maintained its stance on raising benchmark interest rate in a bid to address rising inflation in the country. So far, it had raised rates seven time to 18.5 percent as at its meeting last month.

The Central Bank of Nigeria will base its decision on an assessment of inflation, exchange rate dynamics, fiscal discipline, and the overall investment climate. As the situation evolves, stakeholders will be eagerly watching for any updates or policy changes that may impact the interest rate environment in Nigeria.

Analysts at FBN Quest had noted that the president’s address, “is likely to be well-received by investors. The President emphasized the administration’s commitment to addressing the burden of multiple taxes and barriers to investment.

“Importantly, measures will be implemented to facilitate the smooth repatriation of dividends and profits for investors and businesses. On a related note, the President acknowledged the shortcomings of the existing monetary policy and emphasized the importance of the Central Bank to work towards establishing a unified exchange rate system.

“The harmonisation of multiple exchange rates will lead to favourable outcomes for the country’s fiscal purse. A downward adjustment to the naira exchange rate will result in higher naira revenue derived from the conversion of dollar earnings. It will also close the arbitrage gap between the official and parallel market exchange rates.

“While the possibility of a significant interest rate cut in Nigeria may be an attractive proposition for stimulating economic growth, it requires careful consideration of various factors and close monitoring of economic indicators. The decision must strike a delicate balance between supporting economic activity and maintaining price stability.”

Currency Swap

Recall that Tinubu’s campaign discredited the New Naira notes policy, and raised concerns on the disruptions and financial burden on the vast majority of Nigerians.

However, in his speech, he his position was moderate. He said: “Whatever merits it had in concept, the currency swap was too harshly applied by the CBN given the number of unbanked Nigerians. The policy shall be reviewed. In the meantime, my administration will treat both currencies as legal tender.”

“The dissatisfaction surrounding the new naira notes policy in Nigeria highlights the importance of effective communication, transparency, and consideration of the citizens’ perspectives in implementing currency reforms. While currency reforms can be necessary and beneficial, policymakers must address the concerns raised by citizens and strive to minimise disruptions and financial burdens. A comprehensive and inclusive approach that addresses the broader economic challenges and engages with the public can help build confidence and ensure a smoother transition in the future, “said a market watcher.

Conclusion

In summary, President Bola Tinubu’s monetary policy direction, as stated in his inaugural speech, outlines his vision for addressing key economic issues in Nigeria. The proposal for exchange rate harmonisation aims to redirect funds towards productive investments and minimise arbitrage opportunities. However, the feasibility of achieving this goal depends on various economic factors and policy frameworks.

t Tinubu also advocated for a reduction in interest rates to stimulate investment and consumer spending, with the understanding that careful consideration of inflation, exchange rate dynamics, and fiscal discipline is necessary. Striking a balance between supporting economic activity and maintaining price stability will be crucial in determining the appropriate interest rate policy.

Regarding the currency swap policy, President Tinubu acknowledged concerns about its implementation and the burden it placed on unbanked Nigerians. He emphasised the need for a review and expressed commitment to treating both currencies as legal tender. This highlights the importance of considering the impact of currency reforms on the general population and ensuring transparency and effective communication in policy implementation.

Overall, President Tinubu’s monetary policy direction sets ambitious goals for economic transformation. However, it is important to carefully assess the current realities and implement policies in a manner that minimizes disruptions, addresses citizens’ concerns, and fosters economic stability and growth. Open and transparent communication, as well as engagement with stakeholders, will be crucial in achieving the desired outcomes and instilling confidence in the country’s economic direction.