Now that Nigeria’s economy is recovering from its worst slump in 25 years, the central bank can turn its focus to fighting inflation again — and shoring up its currency.
The Monetary Policy Committee has kept its interest rate at a record-high 14 percent since July 2016, trying to support the economy, and will probably hold it there at its decision this week to contain above-target consumer-price growth.
Officials can take heart from a pickup in West Africa’s biggest economy in the second quarter after more than a year of contraction, as higher oil output boosted the supply of foreign currency to buy raw materials and food.
That upswing probably gives the MPC, led by Governor Godwin Emefiele, room to hold off on a rate cut, according to all except one of 16 economists surveyed by Bloomberg.
“The economy’s return to growth has definitely eased pressure on the authorities,” Gaimin Nonyane, the London-based economic-research head at Ecobank International Group, said in an emailed response to questions. High inflation and the “fragile” nature of the recovery “will continue to undermine prospects for a rate cut. As economic imbalances reduce, we might see policy easing in either November or the first quarter of next year.”
The economy expanded 0.6 percent in the second quarter, driven by growth in agriculture and in oil, which accounts for two-thirds of government revenue. It will take some time to return to above 5 percent, the level of economic expansion before prices and output of crude tumbled in mid-2014, Statistician-General Yemi Kale said in an August interview.
Improved dollar supply also helped ease inflation by reducing import costs, but at 16 percent in August, price growth remains outside the central bank’s target of 6 percent to 9 percent.
Nigeria tightened currency controls soon after crude prices crashed in 2014, which exacerbated an economic crisis, hammered importers and deterred investment. While the central bank has eased some trading restrictions this year — including by creating a foreign-exchange window for investors in which the naira is meant to float freely — the country is still stuck with import curbs and a convoluted system of multiple exchange rates, with spreads stretching almost 20 percent.
Last month, monetary policy officials unified some of their rates when they let currency dealers quote naira levels used in actual trades. The move immediately weakened the naira’s interbank price 14 percent to about 365 per dollar, near the black-market rate, with the currency trading at 353.99 by 9:34 a.m. in the commercial capital, Lagos, on Monday.
“They would want to avoid making any drastic move that will jeopardize the recently achieved stability in the foreign-exchange market,” Nonyane said.
President Muhammadu Buhari’s administration plans to increase spending to a record 7.4 trillion naira ($20.9 billion) this year, as part of a wider plan to boost the economic growth to 7 percent and create 15 million jobs by 2020 by pumping more crude, increasing farmlands and increasing infrastructure spending.
“The MPC may hold rates to maintain stable domestic prices compatible with economic growth objectives, while the government implements fiscal measures to sustain growth,” Lagos-based FSDH Merchant Bank Ltd. said in an emailed note. “Fiscal measures in the form of tax relief and tariff adjustment are required to boost economic activities.”
— With assistance by Simbarashe Gumbo, Paul Wallace, Sophie Mongalvy, and Mark Evans
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