Agora Policy: Despite International Endorsement, Macroeconomic Variables Not Favouring Nigerians

Emmanuel Addeh in Abuja

Agora Policy, a Nigerian think tank and non-profit organisation, has argued that despite the international endorsement of the Bola Tinubu administration’s policies, Nigerians had yet to feel the favourable impact of the government’s recent decisions.

In its latest report on Nigeria’s monetary policy, the Waziri Adio-led group stated that at the heart of the ongoing divergence is the lack of a concerted effort by policymakers to address the forex liquidity problem that underlies the exchange rate turmoil.

“Despite strong action on the monetary policy front, which has garnered widespread praise from domestic and international observers, Nigeria’s key macroeconomic variables have yet to respond favourably for the populace.

“At the heart of this ongoing divergence is the lack of a concerted effort by policymakers to address the forex liquidity problem that underlies the exchange rate turmoil.

“Specifically, the absence of a tractable source of USD liquidity to fill the shortfall from oil flows, which remain largely encumbered, continues to hinder the Central Bank of Nigeria (CBN) efforts to manage the foreign exchange situation,” Agora explained.

It argued that without tangible progress on this front, the persistent weakness of the Naira will continue to drive higher inflation, necessitating even higher interest rates and leaving a precarious outlook for non-oil sector growth.

The group stressed that Nigeria’s external sector gap, looking at the shortfall between the current account  is largely driven by negative trends in foreign net flows and ongoing domestic financial outflows, reflecting the negative impact of the previous era policy of negative real interest rates.

“To bridge that 2023 gap, Nigeria would have needed total flows of $7-$10 billion to prevent significant external reserve drawdowns. Though a return to orthodox policies has partially addressed this issue, a complete restoration to historical trend levels will take time. In short, Nigeria needs a temporary dollar liquidity bridge to allow reforms to take effect.

“Beyond the rhetoric of orthodox reforms, Nigeria’s economic managers need to directly address the forex illiquidity problem by exploring optimal solutions. “These options include a possible Eurobond sale in the $5-10 billion range, though this might be challenging to execute without commercially punitive terms,” it added.

It emphasised that asset sales have been suggested as a way to raise dollar flows, including the sale of certain strategic public corporations.

However, Agora explained that outside the oil sector, Nigeria lacks assets of sufficient strategic value to raise large sums quickly.

‘’Another option is the possibility of sovereign placements, similar to Egypt’s receipt of large foreign dollar deposits from the UAE, alongside support from the EU, UK, and western donors.

“However, such flows depend on international diplomacy, and Nigeria lacks a strong history of focused international relations to unlock capital flows. Alternatively, engaging multilateral agencies like the International Monetary Fund (IMF) for financing options within the context of a reform programme is a viable route.

“Given the difficult reforms undertaken over the last 12 months (hikes in fuel and electricity prices and a shift to a flexible exchange rate system), Nigeria is in a position to negotiate a favourable financing package,” the group posited.

While these are fiscal decisions, not within the monetary policy remit, Agora policy said they are crucial for the CBN to stabilise the Naira exchange rate.

Success in this area, it argued, would stabilise exchange rate trends associated with portfolio flows and build confidence to unlock private and foreign USD flows.

Over the medium term, Nigeria, it said, must focus on restoring organic dollar flows from oil exports by clearing the backlog of encumbrances. Transparency regarding the nature and size of these liabilities will improve confidence about potential timelines for reserve recovery.

“Beyond the immediate forex liquidity problem, there is a pressing need for a credible basis for conducting monetary policy over the medium term. While various Nigerian central bank governors have considered inflation targeting, these have largely been declarative positions without the empirical groundwork for setting achievable inflation targets and the policy leeway to attain these goals.

“The crisis of the last 12 months has underscored the importance of the exchange rate in anchoring inflationary expectations. In a small open economy like Nigeria, monetary policy must balance exchange rate stability, crucial for near-term inflation, with non-mineral export competitiveness.

“This boils down to achieving a Naira Real Effective Exchange Rate (REER) level that anchors inflationary expectations sustainably.

“Additionally, there is a need to clarify monetary policy implementation in light of Nigeria’s regime of fiscal liquidity dominance. Nigeria’s fiscal petrodollar-to-Naira monetisation generates surplus Naira liquidity, complicating the execution of monetary policy.

“Unlike other oil-exporting countries that use fiscal rules to determine the rate of export USD monetisation, Nigeria injects transformed export dollars to Naira at a fiat exchange rate, leading to excess financial system liquidity,” it pointed out.

The significant costs associated with curbing the impact of this excess Naira liquidity on inflation and USD demand, it stressed , drive actual monetary policy.

It argued that recalibrating Nigeria’s monetary policy implementation toolkit to address monthly government liquidity transformations was central to improving monetary policy transmission.

“Ideally, this would require a fiscal rule which requires political capital to reform. If the status quo persists, the default monetary policy posture will be to constantly curtail financial system liquidity to manage the fallout of excess liquidity on USD demand,” it argued.