Subsidy Removal, Naira Float, Inflation, Others in Focus as MPC Meets Today

*Analysts predict tough call 

*CPPE: N9tn increase in money supply pressuring FX market

*Calls on apex bank to develop intervention measures

James Emejo in Abuja and Dike Onwuamaeze in Lagos

As the Monetary Policy Committee of the Central Bank of Nigeria (CBN) holds its first meeting since President Bola Tinubu assumed office, issues in the foreign exchange market, particularly the recent floating of the naira, high benchmark interest rate, removal of petrol subsidy, and rising inflation are expected to shape discussions.

The two-day meeting would commence today, the first since the suspension of Godwin Emefiele as the CBN Governor.
Analysts told THISDAY yesterday that the meeting – the first to be presided over by the acting CBN Governor, Mr. Folashodun Shonubi, would be a difficult call amid rising prices of goods and commodities, high cost of funds in the economy, floating of the foreign exchange which has continued to encounter supply challenges and weakening against the US dollar as well as the hardship brought about by the stoppage of the fuel subsidy regime.

With FX parallel market rate at N865 to the US Dollar as of yesterday and inflation currently at 22.79 per cent as well as the Monetary Policy Rate which stood at 18.5 per cent, some analysts are already divided on what the outcome of the meeting would be -whether to further tighten, ease or retain policy rate.
They argued the MPC would be in a dilemma given that Tinubu, who had appointed Shonubi to replace Emefiele, favours monetary easing which might not be palatable amid current economic headwinds.

The analysts, in separate interviews with THISDAY on the possible outcomes of the MPC expressed different expectations.
President Association of Capital Market Academics of Nigeria, Prof. Uche Uwaleke, said the decision of the MPC would be influenced by the rising inflation expectations due largely to the sudden removal of fuel subsidy, the pressure on the naira and exchange rate volatility occasioned by the recent naira float.

He said the considerations tend to recommend a further rates hike aimed at taming the stubborn inflation, adding that Shonubi, who would be chairing the meeting has been part and parcel of the hawkish MPC stance for months now and so another rates hike will not come as a surprise.
Uwaleke said, “Be that as it may, the MPC should equally recognise that the removal of fuel subsidy has slowed down economic activities considerably with attendant drop in productivity.

“So, economic growth and jobs are already negatively impacted such that a further monetary policy tightening would only worsen the situation through the credit channel as cost of capital is increased and access to credit by small businesses is made more difficult.”
He said a further increase in the MPR was likely to endanger the asset quality of banks through an increase in non-performing loans as deposit money banks reprice their loans.

Uwaleke added, “In this regard, the balance of risks dictates that the MPC should pause the policy rate hikes, which has been on since May last year by maintaining a hold position on all policy parameters during the meeting.
“The MPC should recognise that much as its primary mandate is to maintain price stability, it equally has a responsibility to support output growth. This is against the backdrop of the fact that many of the factors driving inflation in Nigeria, such as insecurity affecting food output and high energy costs are outside the control of the CBN.

“All said, the MPC should seize the opportunity of the meeting to signal readiness to support output growth through policies geared towards fostering a low-interest rates environment while keeping an eye on inflation using a mix of heterodox measures.”
In his contribution, Wealth Management and Business Development Consultant, Mr. Ibrahim Shelleng, said, “Honestly, it’s tough to call. Whilst the president’s policy is to crash interest rates, I am not sure whether this will translate at the MPC just yet. Especially given that the current CBN governor is still in an acting capacity

“Also, with inflationary pressures from rising energy costs, crashing rates may lead to greater demand-pull inflation pressures.”
On his part, Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr. Chijioke Ekechukwu, said he expected the MPC to retain the interest rate at current levels.  
He said, “We expect that CBN should not continue to increase MPR just to check inflation. This is because there are many other factors that are responsible for an increase in inflation.

“If the MPR is increased indiscriminately, it will have a positive correlation with an increase in interest rates. When interest rate is increased, money in circulation will be distorted, and the economy falls short of stimulation. I, therefore, expect that MPR will remain unchanged.”
Also, Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, predicted that the CBN would either hold or reduce MPR.
He said, “The MPC meeting may likely hold interest rates or reduce rates due to the policy direction of the new government to boost economic activities in the country.

“The previous meetings have always increased the rate to the detriment of the economy and it has caused a continuous rise in inflation.”
Meanwhile, an economist and Founder of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf has stated that the curious growth in broad money supply in June, led to pressure on the naira in the foreign exchange market.

Yusuf also called on the CBN to come up with intervention measures that would moderate the volatility in the country’s FX market.
He made the call yesterday in a statement titled “The Naira Exchange Rate Conundrum,” in which he stated that the curious surge in monetary expansion in June by 15 per cent might have contributed to the source of pressure on the Naira in the FX market.  

He said: “The volatility in the FX market is naturally unsettling.  But it is not unexpected given the long period of distortions in the foreign exchange market.  Correcting the entrenched distortions would take some time.
“But in the meantime, the monetary authorities should come up with a sustainable intervention framework to ensure the moderation of current volatility in the FX market.

“We recognise the FX supply limitations, but the system needs to be managed in way that would not undermine investors’ confidence. Erosion of confidence triggers speculation and influences expectations, which in turn trigger diverse responses among economic players.”
He also attributed the pressure in the country’s FX market to “a curious surge in monetary expansion in the last one month.  Money supply grew by an unprecedented 15 per cent in one month between May and June 2023.”

The economist said broad money grew by over N9 trillion, from N55.7 trillion to N64.9 trillion. “This surge in monetary growth is unprecedented. Obviously, this must have had an effect on the exchange rate.
“The monetary authorities should investigate this drastic growth in money supply and take steps to curb subsequent expansion.  Such dramatic growth in money supply poses a significant risk to macroeconomic stability, especially price stability,” he said.

Yusuf recalled that over the last few years there had been a cumulative backlog of unmet foreign exchange demand, running into billions of dollars as a result of acute illiquidity in the foreign exchange market.
He argued that with a more liberalised FX market, the pressure of the backlog of unmet demands and other maturing FX related obligations have been unleashed on the investors and exporters window.

According to him, “transiting from a repressive market environment to a more liberalised market could be a source of market instability.  However, there is need for vigilance to prevent questionable capital outflows or speculative assault on the currency.
“A free market is not synonymous with complete absence of regulation. Free enterprise has to be complemented with an appropriate regulatory framework to curb illicit financial flows.”

Yusuf also pointed out that the frequency and scope of CBN’s intervention in the FX market had decelerated compared to first five months of the year as shown by recent reports from the CBN.
The reports indicated “a total of $17 billion intervention by the CBN in the FX market in 2022.  This is an average of N1.4 billion per month. Since the inception of the present administration, it is doubtful whether we had seen an intervention of up to $1 billion in total.

“It expected that as the scale of intervention improves, the volatile will be subdued,” he said.  
The CPPE also believed “that the President Bola Ahmed Tinubu’s administration is on the right path and that the current volatility in the foreign exchange market are challenges typically inherent in a major policy transition.  In a couple of months, we expect the instability to subside.”