CBN Hinges Monetary Policy Easing on Reduced Inflation

•Says exchange rate pressure expected to decline in 2024

Nume Ekeghe

The Deputy Governor, Economic Policy, Central Bank of Nigeria (CBN), Muhammad Abdullahi, yesterday, said upon achieving the Central Bank of Nigeria’s (CBN) 2024 inflation target of 21.4 per cent, the apex bank would ease monetary policy so as to stimulate economic growth.

In addition, Abdullahi expressed confidence that effective implementation of monetary and fiscal policies would help ease the pressure in the foreign exchange market.

He said this at the, “10th National Economic Outlook: Implementation for Business in Nigeria 2024,” organised by the Chartered Institute of Bankers of Nigeria (CIBN) Centre for Financial Studies in Lagos.

Abdullahi, who represented by the Director, Monetary Policy Department, CBN, Muhammed Tumala said: “Inflationary pressures may persist in the short-term but are expected to decline in 2024. The recently introduced inflation-targeting policy of the bank is expected to rein-in inflation, which is projected to decline to 21.4 per cent, following the crystallisation of government reforms, despite its persistence in 2023.

“Food inflation is expected to decrease due to improved agricultural productivity. The expected deceleration will largely reflect the base effect of Government reforms in energy and the easing of global supply chain pressures.

“This would boost consumer confidence and purchasing power, benefiting businesses across board.”

He noted that the CBN’s decision to adopt the inflation-targeting framework to achieve its core mandate was common among central banks.

“Inflation targeting involves using monetary policy tools such as the policy rate to achieve a specific inflation rate within a targeted range. The aim is to maintain price stability, which is crucial for human welfare, businesses and sustainable economic growth,” he said.

He added: “The CBN will then adjust its policy rate in response to inflation trends and a decrease in inflationary pressures can prompt a more accommodative monetary policy.

“Lower interest rates mean that the cost of borrowing for businesses decreases, making capital more accessible. This, in turn, can stimulate investment, businesses, fuelling growth and job creation.”

Speaking further on the exchange rate regime, he said: “I would want to inform you that the major policy thrust of the CBN is the pursuit of a flexible exchange rate regime that has resulted in the unification of the foreign exchange market into a single window.

“Also, the bank has reverted to the conventional monetary policy approach with a focus on attaining price stability, which fosters sustainable economic growth for Nigeria. The importance of low and stable inflation for businesses cannot be over-emphasised.

“Therefore, it is important to note that the anticipated stability in the foreign exchange market would not only be attributed to a substantial reduction in the country’s petroleum products importation by 2024, but also to the recent market determined exchange rate policy of the CBN.

“Staff estimates reveal that exchange rate pressures is expected to decline significantly in 2024.”

He reiterated that the recent exchange rate reform, which aims to streamline and harmonise multiple exchange rates, plays a crucial role in eliminating distortions and uncertainties in the foreign exchange market.

Also, he added that the unification of foreign exchange aligns with global best practices, promotes transparency and reduces arbitrage opportunities, which had previously existed in the fragmented exchange rate system.

“A consistent and stable exchange rate not only bolsters investor confidence, signalling a commitment to market-driven policies, but also acts as a powerful magnet for foreign investment. This streamlined approach ensures a smoother operation of the economy, enhancing Nigeria’s attractiveness to global investors seeking stability and clarity in currency valuations.”

Another factor he stated would spur the economy was the increased allocation to Small and Medium Enterprises Development Agency of Nigeria (SMEDAN).

He said: “Like a builder, the 2024 budget lays bricks for the future, prioritising critical infrastructure and human capital development.

“We have seen allocations for education, healthcare, infrastructure and other key sectors of the economy geared toward human development and growth.

“In terms of allocation, there is increased government focus in medium enterprises. For instance, allocation to SMEDAN increased by 238.87 per cent to N19.79 billion in 2024, compared with N5.84 billion allocations in 2023. This shows government’s commitment to growing the business sector.”

In his remarks, the President/Chairman of Council, CIBN, Ken Opara said: “In the face of adversity, we trust that our banking sector will not only weather the storm but emerge stronger, more resilient, and better equipped to contribute to the sustained growth and prosperity of our nation as we share insights on how we can navigate the economic terrain in 2024 and beyond.

“Looking ahead to 2024, our economic landscape presents both challenges and opportunities shaped by specific, quantifiable realities.

“Foreign exchange fluctuations have depreciated the naira by 49 per cent over the past year impacting import costs for businesses. Disruptions in global supply chains have further burdened manufacturers, pushing up the production costs. These factors necessitate a strategic response from both the government and the banking sector.”

He reiterated that government’s actions must prioritise economic diversification to break our dependence on oil, promote exports and enhance value addition in key sectors like agriculture and manufacturing.

“Nigerian banks, meanwhile, must proactively prepare for capitalisation to service the desired $1trillion economy by 2026 amidst economic uncertainties.

“Building buffers to withstand potential shocks, for example, aiming for the optimal capital adequacy ratio would enhance their resilience and ability to support economic growth.

“Additionally, embracing digital transformation and developing innovative financial solutions tailored to SMEs and other vulnerable sectors will be key to navigating the evolving economic landscape successfully,” he said.