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CBN's policy decision risky, wrong or wise
Nigeria's Monetary Policy Committee this week maintained its tight monetary stance, keeping the benchmark interest rate unchanged at 14 per cent. This has led to a series of debates about the impact on economic growth.
Fri, 23 Sep 2016 11:22:02 GMT
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AI Generated Summary
- Significant misalignment between monetary and fiscal policy in Nigeria highlighted by the decision to retain the MPR at 14%.
- Challenges posed by the sharp increase in inflation, downgrade by rating agencies, and wide gap between official and parallel market Naira exchange rates.
- Caution against hasty asset sales and reliance on foreign portfolio investments, emphasizing the need for coordinated policies and structural reforms to restore investor confidence and economic stability.
Nigeria's Monetary Policy Committee recently made headlines by maintaining its tight monetary stance, keeping the benchmark interest rate unchanged at 14 per cent. This decision sparked a series of debates about its impact on economic growth, forex supply, and policy consistency. Tilewa Adebajo, CEO of CFG Advisory, shed some light on the implications of this decision in a recent interview on CNBC Africa.
Adebajo pointed out that the decision to retain the MPR at 14% was not entirely surprising, given the indications from previous statements by the NPC. However, he highlighted a significant misalignment between monetary and fiscal policy in Nigeria. While the finance minister advocates for lower interest rates to stimulate growth, the central bank has yet to establish a clear policy for inflation targeting.
One of the crucial issues raised by Adebajo was the sharp increase in inflation from 9% to 17% in just one year. This alarming trend has raised questions about the central bank's strategy to address inflation and its impact on the economy. Additionally, the downgrade by rating agencies following the NPC's decision has put Nigeria in a challenging position, with its investment grade status now downgraded to junk bonds.
Another point of contention was the wide gap between the official and parallel market exchange rates for the Naira. Adebajo emphasized the need to address the confidence issues causing this disparity to curb arbitrage opportunities. He cautioned against over-reliance on foreign portfolio investments to stabilize the currency, as structural issues need to be resolved to attract sustainable foreign direct investments.
In response to the government's plan to sell assets to boost revenue and forex reserves, Adebajo warned against hasty decisions driven by panic. He stressed the importance of aligning monetary and fiscal policies to restore investor confidence and create a clear roadmap for economic recovery. Adebajo also highlighted the significant revenue shortfall faced by the government and the underutilization of capital expenditure, signaling the need for urgent reforms.
The recent depreciation of the Naira to a new low against the US dollar further underscored the urgent need for a comprehensive review of Nigeria's economic policies. Adebajo called for a strategic reassessment to prevent further panic in the market and address the distortions plaguing the foreign exchange system.
As Nigeria grapples with economic challenges and policy dilemmas, the debate over the wisdom of the NPC's decision continues. Balancing the need for price stability with growth objectives and forex stability remains a delicate balancing act for policymakers in a nation facing deep recession and structural imbalances.