Where the naira exchange rate, there the crystal ball, By Uddin Ifeanyi
As the CBN continues to rewrite monetary economics, the old anthem no longer matters… we’ll have to wait for the central bank to come up with new policy tools to manage national monetary conditions. Until then, the invitation to call for the direction and pace of policy changes next year, is simply a request to look into the crystal ball.
One of the most difficult invitations I get these days is to come and describe to a room of business leaders where I think the Nigerian economy will be for the next 13 months. The facts are never in dispute. Clearly, by the end of the year, the local economy would have grown faster than previous forecasts from the International Monetary Fund (IMF) and World Bank, i.e. much closer to what at the time seemed overly optimistic estimates from the federal government. In large part because any improvement in the economy this year will always be overstated by the unusually dismal performance of last year.
How to interpret all of this, however, is another matter, especially for managers who must agree on their investment and currency hedging decisions before the new year? In shaping the outlook for next year, three aspects of this year’s growth are important. The first is the fact that despite this faster recovery, companies continued to experience a decline in final demand. Many who have re-equipped their operations to reflect this drop in demand – by selling goods and services in more discreet single-use packaging – have also held back major new investments. Second, although oil prices have remained very high throughout this year, Nigeria’s revenues from the export of hydrocarbons have plummeted.
Concerns over this second condition relate as much to the importance of oil revenues to the economy as to the longer-term implications for the economy of a secular decline in productive capacity in the upstream oil and gas sector. which is unlikely to reverse next year, if ever. Beyond either of these considerations, however, over the next cycle of the plan, we are urged to take a critical look at government spending. “In summary, Nigeria’s fiscal position is deteriorating,” the World Bank said in a recent commentary on the economy. With struggling consumer spending – a consequence of relentless price hikes from which the economy continues to suffer – companies have responded by cutting investment plans, and the federal government is struggling next year to keep the economy going. funding for provincial governments, where will growth come from in 2022?
With foreign exchange earnings likely to fall next year and, as a result of this development, a deceleration in the rate of growth of the gross external reserve balance, would the Central Bank of Nigeria (CBN) finally let the forces of the market determine the exchange rate of the naira rate?
In all likelihood, once the base effect we are seeing in 2021 wears off, we would again be scratching the economy from the bottom of almost every newspaper. For most companies operating in the country, the exchange rate outlook is the unsolicited rider of this predicament. With foreign exchange earnings likely to fall next year and, as a result of this development, a deceleration in the rate of growth of the gross external reserve balance, would the Central Bank of Nigeria (CBN) finally let the forces of the market determine the exchange rate of the naira rate?
At this point in the question-and-answer session, I recount my favorite allegory on the Nigerian economy.
Overall this year, demand has recovered faster than supply. This therefore exerted upward pressure on prices in developed economies. However, despite the central banks’ strong commitment to price stability in these economies, they have delayed raising their benchmark interest rates to control prices. Part of the reason is fears that rate hikes will stifle the nascent recovery that economies have enjoyed this year. In part, too, most commentators are confident that pricing pressures will ease as supply chain issues are resolved until early next year. Yet rates have remained high and increasingly tight. Indeed, much of commentators are now concerned that higher rates threaten a negative loop that spills over to high wages and then back to prices.
… This process is as much about a clearly articulated monetary policy strategy, where the price stability objectives of central banks are achieved through tighter monetary conditions, and the clarity with which central bankers communicate the elements of that strategy. While this can make central banks seem predictable and boring, it makes business planning easier.
Thus, central banks in Europe and North America have reduced their bond purchase programs and now appear ready, later next year, to raise rates. Ultimately, this process is as much about a clearly articulated monetary policy strategy, where the price stability objectives of central banks are achieved through tighter monetary conditions, and the clarity with which central bankers communicate the elements of that strategy. . While this can make central banks seem predictable and boring, it makes business planning easier.
The same cannot be said of our local circumstances. As the CBN continues to rewrite the cash economy, the old hymnbook no longer matters. As with Turkey’s advance on the path of new economic heterodoxy, where high interest rates are implicated in rising domestic prices, we will have to wait for the central bank to come up with new policy tools to manage monetary conditions. national. Until then, the invitation to call for the direction and pace of policy changes next year, is simply a request to look in the crystal ball.
Alas, I am not a circus act.
Support PREMIUM TIMES integrity and credibility journalism
Good journalism is expensive. Yet only good journalism can guarantee the possibility of a good society, responsible democracy and transparent government.
For free and ongoing access to the best investigative journalism in the country, we ask that you consider modestly supporting this noble enterprise.
By contributing to PREMIUM TIMES, you are helping to maintain relevant journalism and ensure that it remains free and accessible to everyone.
Make a donation
TEXT OF THE ANNOUNCEMENT : To advertise here . Call Willie +2347088095401 …