Bearing the Cost of Resetting the Economy

James Emejo writes on current efforts by the monetary authority to reset the economy even as the apex bank assures Nigerians that the  prevailing hardship is temporary

There is no gainsaying the fact that Nigerians are currently facing tough times – following a cocktail of policy reforms particularly in the financial system. At the inception of the administration of President Bola Tinubu, there was the bold decision to end petrol subsidy which immediately impacted the cost of transportation and impact on prices of good and commodities.
Among other things, the administration further set out to introduce reforms in the country’s Foreign Exchange (FX) market by floating the Naira which had currently become weaker against the United States’ Dollar.

Also, key macroeconomic indices remained poor – inflation, currently at 29.90 per cent continues to wreak havoc on the economy coupled with the benchmark interest rate which is at 18.5 per cent – implying a negative interest rate regime.
If anything, the current FX crisis which has impacted cost of living remained one of the biggest headaches for economic managers. Prices of food and essential items have more than tripled in recent times.

The National Bureau of Statistics (NBS) disclosed that Consumer Price Index (CPI) which measures the rate of change in prices of goods and commodities rose to 29.90 per cent in January compared to 28.92 per cent in the preceding month. Year-on-year, headline inflation was 8.08 per cent higher compared to 21.82 per cent in January 2023.
Food inflation rate increased by 11.10 per cent year on year to 35.41 per cent compared to 24.32 per cent in January 2023, while core inflation which excludes the prices of volatile agricultural produces and energy also rose by 4.71 per cent to 23.59 per cent year on year compared to 18.88 per cent in January 2023.
For instance, the prices of cement which Nigerians were hitherto assured to crash this year have more than doubled from about N5,000 to between N12,000 and N15,000 per bag alongside other building materials. The development has been partly blamed on rising gas rates and import duties which had been raised in recent times.

However, the current economic quagmire has been blamed on faulty fundamentals which the current administration is making frantic efforts to address. One of the major concerns had been that the country remains a major import-depended economy that constantly requires FX to import food and commodities and well as fund education, vacation abroad among others – its inability to industrialise and become a net exporter of goods remains one of the factors contributing to the present hardship. Nigeria has not been able to earn enough dollars to cater for its growing import needs, thereby putting enormous pressure on the local currency.

Temporary Challenges
Only recently, the Governor of the Central Bank of Nigeria (CBN), Mr. Olayemi Cardoso, insisted these costs of reforms are temporary, adding that the decisions and policy interventions of the apex bank would in no time address a lot of fundamental issues bothering Nigeria’s macroeconomic credentials and “ultimately put us on a surer path to prosperity.”
Addressing lawmakers on the state of the economy, the CBN governor blamed Naira’s weakness on increased FX demand pressures fueled by speculative forex demand, inadequate forex supply, increased capital outflows, and excess liquidity.

According to him, the shift to a market-driven exchange rate (floating) was intended to create a stable macroeconomic environment and discourage currency hoarding, adding however, that the short-term volatilities are due to arbitrage and speculation.
He said: “We must understand that the genuine issue impacting the exchange rate is the simultaneous decrease in the supply of, and increase in the demand for, US Dollars. It is also clear that the task of stabilising the exchange rate, while an official mandate of the CBN, would necessitate efforts beyond the bank itself. It will also include actions by corporates and individuals to reduce our frequent demand for the dollar for business and personal needs.”

He said: “To address exchange rate volatility, a comprehensive strategy has been initiated to enhance liquidity in the FX markets. This includes unifying FX market segments, clearing outstanding FX obligations, introducing new operational mechanisms for BDCs and IMTOS, enforcing the Net Open Position limit, Open Market Operations and adjusting the remunerable Standing Deposit Facility cap among others.
Also lately, the CBN declared that going forward, International Oil Companies (IOCs) would only be allowed to repatriate a maximum of 50 per cent of export proceeds in the first instance, adding that the balance of 50 per cent of export proceeds may be repatriated after 90 days from the date of inflow of the proceeds.

Moreover, the central bank prohibited the payment of Personal Travel Allowance (PTA) and Business Travel Allowance (BTA) by cash going forward, stressing that PTAs and BTAs must henceforth be disbursed through electronic channels only, including debit or credit cards to curb abuses and boost transparency in FX transactions.
Furthermore, the central bank announced the review of the allowable limit of price deviation for exports and imports to -15 per cent and +15 per cent of the global average prices, respectively under the Price Verification System (PVS).
All the measures were aimed at addressing the persisting liquidity challenges in the economy which had worsened living conditions.
He said: “These measures, aimed at ensuring a more market-oriented mechanism for exchange rate determination, will boost foreign exchange inflows, stabilize the exchange rate, and minimize its pass-through to domestic inflation.”

Reforms’ early fruits
Cardoso told the lawmakers that indeed, in spite of the temporary economic hardship, the reforms so far implemented by the central bank have already started yielding early results with significant interest from foreign portfolio investors (FPIs) that have already begun to supply the much-needed foreign exchange to the economy.
According to him over $1 billion had been invested in the Nigeria Treasury Bill auction of N1 trillion which saw an oversubscription recently.
He pointed out that “Our measures aimed at improving USD supply into the Nigerian economy, has significant potential in taming the volatility of the exchange rates. However, for these measures to be sustainable, we must as a country, moderate our demand for FX.
“We must understand that the genuine issue impacting the exchange rate is the simultaneous decrease in the supply of, and increase in the demand for, US Dollars. It is also clear that the task of stabilising the exchange rate, while an official mandate of the CBN, would necessitate efforts beyond the Bank itself. It will also include actions by corporates and individuals to reduce our frequent demand for the dollar for business and personal needs.”

Structural constraints, money-supply as contributors to inflation
According to Cardoso, the upward trend in food inflation was primarily due to supply shocks caused by insecurity, climate-induced factors including flood and rainfall shortage in some cases, inefficient, subsistent and seasonal farming practices as well as importation bottlenecks that had impacted the prices of imported food items.
He stated that the recent exchange rate volatility had fueled more foreign demands for agricultural products, especially, from neighbouring countries.
He said while this presents an opportunity to expand and boost agricultural output, hence creating jobs in the sector, supply constraint exacerbated demand, instigating more inflationary pressures.

On the money supply side, the CBN governor insisted that money supply remained one of the factors fueling the current inflationary pressure.
He said: “For instance, an analysis of the trend of the money supply spanning over 9 months shows that M3 increased from N52.01 trillion in January 2023 to N68.25 trillion in November 2023 representing N16.24 trillion or 31.22 percent increase over the period. Increase in Net Foreign Asset (NFA) following the harmonisation of exchange rates and the N3.22 trillion ways and means advances were the major factors driving the increase in money supply.

“We have also halted quasi-fiscal measures totaling over 10 trillion naira by the Central Bank of Nigeria previously disguised as development finance interventions. These measures had contributed to increase in money supply thereby raising prices to the levels of Inflation we are grappling with today.”
Nonetheless, he said the CBN’s adoption of inflation-targeting framework involved clear communication and collaboration with fiscal authorities to achieve price stability, potentially leading to lowered policy rates, stimulating investment, and creating job opportunities.”

Analysts hail reforms, lament rising prices
Speaking to THISDAY on the current hardship and policy reforms, Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, said the measures introduced by the central bank had caused more revenue inflows into the country. But he  expressed worry over the rising cost of living, adding that the government needed to do more ameliorate the sufferings of the people
He said: “The federal government have witnessed tremendous increase in revenue due to floating of the Naira and is projected to enable the FIRS achieve its revenue target for the year. However, dollar continues to surge against the Naira due to speculation, excessive purchase of the greenback by some people to edge inflation which has led to increasing scarcity of the US dollars.”

He said: “These reforms by the CBN just like the fuel subsidy removal is coming at a time when the ordinary Nigerian is already on the edge due to low purchasing power and astronomical increase in cost of goods and services with no rise in income.
“So, to an average Nigerian these reforms have only added to their already bad situation. It is agreed that good reforms could take time to turnaround a very bad economy but in the Nigerian situation all the bullets are aimed at the people without a way of escape.
“The reforms would have been bearable if there were meaningful palliative or realistic efforts to assuage the hardship in the land.”