Necessity of inflation targeting amidst investment-friendly policies: Nigeria

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The recent Monetary Policy Committee (MPC) urged the monetary and fiscal authorities to sustain collaboration towards addressing inflationary pressure and incentivise domestic investment. In this report, CHIMA NWOKOJI looks at how the policies recently released align with MPC’s stance.

THE Central Bank of Nigeria (CBN)’s Monetary Policy Committee (MPC) on Tuesday last week moderately hiked Monetary Policy Rate (MPR) to 18.75 percent. The acting governor of the CBN, Folashodun Shonubi, announced the decision after a two-day meeting in Abuja.

The rate hike caps all other policies that were recently churned out by monetary authorities.

The Committee urged the monetary and fiscal authorities to sustain collaboration towards addressing the inflationary pressure and incentivise domestic investment to reduce unemployment and boost output growth.

It also enjoined the Federal Government to continue to explore policies to improve investor confidence in the Nigerian economy and pave way for foreign and domestic investments. Members emphasised the need to attract investments, particularly, to auto manufacturing, aviation and rail industries to boost non-oil revenues.

Although there are concerns that the petrol subsidy removal, exchange rate liberalisation and distribution of palliatives will have pass-through effects on inflation, the Committee recognised several measures put in place by the Bank to boost foreign exchange liquidity. Particularly, members were of the view that the recent policy on foreign exchange market reform will increase market transparency and encourage more foreign capital inflows.

The apex bank was therefore urged to leverage on effective policies to attract remittances from diaspora to help moderate inflation and exchange rate pressures. In recent time, the CBN has released circulars/policy guidelines impactful on the economy.

For instance, it reduced numbers of licensed Bureau De Change (BDCs) in Nigeria from 5,689 to 2,991 in December 2021; reviewed the Cash Reserve Requirement of Merchant Banks from 32.5 percent to 10 percent effective from August 1. CBN Issued New Corporate Governance Guidelines to all banks and financial HoldCos and announced Naira as a payout option for receipt of Proceeds of Diaspora Remittances among others.

Summary of latest policies

In its latest regulatory step, the CBN instructed banks to vacate “Post-No-Debit” restriction placed on 440 accounts of customers. This covers individual and corporate accounts across the country. A post-no-debit means that all debit transactions on the accounts, including ATMs and cheques, have been blocked but can receive inflows.

The CBN on July 18 reduced the number of Bureau de Change (BDC) operators in the country to 2,991 from 5,689 as of December 31, 2021. This represents about 47 percent drop in numbers. This developments according to analysts, is a reflection of the monetary policy cleansing announced by President Bola Tinubu during his inaugural speech.

On July 15, the CBN informed all Merchant Banks that it has approved a reduction in their cash reserve requirement from 32.5 percent to 10 percent effective August 1.

The above regulatory measure is in recognition of the nuanced business model of the Merchant Banks, in particular their wholesale funding structure, regulatory restrictions from the retail market and permissible activities vis-a-vis conventional commercial banks.

On July 14, in exercise of powers conferred by the CBN Act 2007 and the Banks and Other Financial Institutions Act 2020, the apex bank issued the Corporate Governance Guidelines for Commercial, Merchant, Non-Interest, and Payment Services Banks in Nigeria, and the Corporate Governance Guidelines for Financial Holding Companies in Nigeria.

In developing these guidelines, the CBN adapted relevant principles and recommended practices of the Nigerian Code of Corporate Governance issued by the Financial Reporting Council in 2018, global corporate governance practices as well as other related governance codes, circulars and directives made by the CBN. The CBN on July 12 announced Naira as a payout option for receipts of proceeds of International Money Transfers.

Accordingly, all recipients of diaspora remittances through the CBN approval IMTQOs on the attached list were given the option of receiving Naira payment in addition to USD and eNaira as payout options.

The CBN issued the Customer Due Diligence Regulations to assist financial institutions with the implementation and compliance with provisions of relevant laws and regulations relating to customer due diligence. This was contained in a circular issued on June 20 and signed by the Director, Financial Policy and Regulation Department (FPRD), Mr Chibuzor Efobi.

The CBN issued a circular to deposit money banks on July 24 to resume enforcing the 65 percent minimum Loan-to-deposit policy effective July 31.

The policy aims to moderate industry excess liquidity as the money supply soared to N64.36 trillion in June. Analysts acknowledge that the excess liquidity has been behind the irresponsive asset yields to the hawkish monetary tightening (365-day T-bills 5.94 percent stop rate vs 18.5 percent MPR).

Deposit money banks with LDR below the minimum requirement (65 percent) as of that date will be liable to a CRR sub-charge of up to 50 percent of the lending shortfall implied by the target LDR.

In further assessing the impact of some of these latest policies, analysts said economic reforms such as the foreign exchange (FX) market liberalisation could gradually attract foreign investments and boost capital inflows in the long term.

However, in the short run, investors will likely adopt a wait-and-see approach. This may be a result of the absence of further reforms to strengthen business and economic fundamentals.

Indeed, a rise in inflation will likely reduce the real yields or returns on investment, and a rise in energy, food, transportation, and import costs may dampen consumer spending on non-discretionary items, Financial analysts at PriceWaterHouseCoopers (PwC) Nigeria stated in a recent report.

Analysts believe that exchange rate unification should improve the size and number of official FX transactions for banks as the CBN recently revised the daily transaction limit to $10,000.

Proshare market intelligence indicates that First Bank Holdings (FBNH) is a good example. It has traded over N200 billion worth of FX since the policy implementation, indicating a larger FX income for 2023. The review of the Cash Reserve Ratio (CRR) to 10 percent for Merchant Banks is aimed at boosting long-term financing. Professor Uchenna Uwaleke, said the development will place the wholesale banks in a stronger position to attend to the financing needs of the real sector.

However, MPC members noted the potential impact of the recent policy reforms on financial system stability and called on the management to act proactively to ring-fence the banking system from any possible second-round effects.

The Committee remained cautious in arriving at a policy decision as members noted the need to continue to support investment, which will ultimately lead to the recovery of output growth. The balance of these arguments thus, leaned in favour of a moderate rate hike, to sustain efforts at anchoring inflation expectation, narrow the negative real interest rate gap, and improve investor confidence.

Overall, a herd of experts sees these latest policies by the CBN as having positive effects as they gradually permeate various sectors of the Nigerian economy.

Rise in foreign transactions

Amid the bounce of a new administration and raft of changes in policies, total foreign transactions performed by investors at the floor of the Nigerian Exchange Limited (NGX) grew to N145.08 billion in the first six months (H1) of 2023.

This is according to the recently released data on domestic and foreign portfolio investment report in Nigeria’s equity trading for the month of June 2023; which in the first four months of 2023, stood at N62.18 billion owing to the soaring inflation, prolonged FX scarcity as well as uncertainties building up to the 2023 elections.

However, the report – prepared on a monthly basis by NGX Regulation Limited, with trading figures from market operators on their Domestic and Foreign Portfolio Investment (FPI) flows, revealed that total domestic transactions on the Exchange stood at N1.306 trillion whilst total foreign transactions stood at N145.08 billion at the end of the period under review.

The report also revealed that total transactions at the nation’s bourse increased by 25.96 percent from N322.92 billion (about $693.99 million) recorded in May 2023 to N406.75 billion (about $537.87 million) in June 2023.

The performance of last month when compared to the performance in June 2022 (N156.52 billion) revealed that total transactions increased by 159.87 percent.

Sectoral forex utilisation

Stakeholders anticipate that the foreign exchange (FX) liquidity constraints will ease over the medium term as the backlog of trapped Foreign Potfolio Investments (FPI) funds is addressed, and investors’ confidence in Nigeria gradually rekindles following meaningful reforms by the current administration.

This anticipation is premised on the fact that CBN data on the total sectoral utilisation of FX through official channels was flat (-0.7 percent) quarter on quarter (q/q) at $7.5 billion. However, on a year on year (y/y) basis, it increased by 10 percent y/y. The total figure comprised FX usage for the importation of visible goods, which increased four percent q/q to $4.9 billion or around 66 percent of the total FX utilised during the quarter. FX utilisation for the importing of invisibles such as financial services, education and health fell by -9 percent q/q to $2.6 billion.