There seems to be a realisation by both the fiscal and monetary authorities that checking the continuous downward slide of the naira is beyond a single line of policy action, hence the adoption of a multiplicity approach.

Apart from adopting a strict monetary tool at its just-concluded Monetary Policy Committee (MPC) meeting to tighten liquidity and shore up the value of naira, the bank also sold treasury bills at 21.5 per cent which could yield a record high of 27.3 per cent.

This clearly shows that the CBN under Yemi Cardoso is targeting foreign capital inflow aimed at achieving stability in the foreign exchange (FX) market. Indeed, a record N1.06 trillion was sold on Friday in open market operations (OMO).

The stop rate on the one-year bill was 21.5 per cent compared to 17 per cent at the last auction. The stop rate on the one-year bill works out to a yield of 27.3 per cent.

The stop rates on the 95-day and 179-day bills hit 19 and 19.5 per cent respectively.
The auction saw strong investor demand for the one-year OMO bills as it was oversubscribed to the tune of N1.01 trillion, three times more than the N355 billion offered.

The shorter OMO bills tenor saw low buys of N37.05 billion and N6.00 billion for the 95-day bills and 179-day bills respectively compared to the N75 billion offered.
Before this auction, the CBN had had three OMO bills auctions and had mopped up N1 trillion.

This is an indication that the CBN is pursuing a tighter monetary space, especially with the MPR jacked up by a record 400 basis points to 22.75 per cent in the same week.
The CBN governor had disclosed plans by the apex bank to increase OMO frequency and volumes to mop up liquidity and provide investment opportunities for foreign portfolio investors (FPIs).

While the government is seeking to boost the foreign reserve aimed at keeping the foreign market afloat, inflation has spiked to 29.9 per cent, even as some experts believe the inflation in Nigeria is well above 50 per cent going by the costs of food and basic items.

Amid the rising costs of living and the worsening misery index, the CBN remains optimistic about a possible moderation of inflation to 21.4 per cent soon.
This recent move seems to be a strong signal to the global business that Nigeria is ready to do business. Selling N1 trillion OMO bills at a record 21.5 per cent is targeted at attracting foreign investors.

In the short term, the OMO could stabilize the exchange rate and possibly strengthen it. It could also provide a platform for economic growth if the fiscal authorities are efficient in playing their role, experts have said.

On the impacts of the new adjustments, an economist, Paul Alaje, said businesses that are on banks’ facilities (loans) should brace up for rate adjustment in the short term. This may further push costs up and, in case of transferable burden, these costs may be passed to the consumers.

He added that employment will be crowded out, explaining that unemployment will increase; this is expected within the next quarter.

Alaje projected that inflation is expected to grow slowly despite the rate adjustment.
“This is because the effect of cost-push is still potent on inflation. This may affect the GDP growth rate if the fiscal authority does NOT respond with major capital expenditure within the shortest period,” he added.

He further stressed that if FAAC inflows and spending do not impact the economy as expected, its combined impact with this adjustment in rates may lead to financial distress in the system, given the reality of the current economic quagmire, saying: “We have made our choices. However, economic choices have consequences.”

No doubt increasing the interest rate to 22.75 per cent and the cash reserve ratio to 45 per cent will not only increase the lending rate but also reduce the amount available to banks.

It is, therefore, expected that with an increased interest rate, more liquidity will be mopped up thereby controlling the inflation rate and may help stabilize the naira by attracting foreign portfolio investors.

Recall that CBN’s inflation target is 21 per cent and an interest rate above the target sends enormous confidence to investors.
But achieving success also depends on a stronger handshake between the monetary and fiscal authorities.

The CBN governor in his briefing after the MPC meeting noted the fact that some of the causes of inflation and the control thereof are beyond the monetary team which stresses the need for collaboration.

Cardoso pointed at the tax-to-GDP ratio of 30 per cent needed by a nation undergoing development like Nigeria but that is a challenge as Nigeria’s tax-to-GDP is around 18 per cent.

Experts argue that an efficient tax system not only helps generate revenue for the government but also helps control inflation, pull domestic resources, ensure a competitive economy and increase economic growth.

The ball may have been pushed to the Federal Inland Revenue Service (FIRS) to push up the tax to GDP to the 30 per cent threshold.

A former deputy governor of the CBN, Kingsley Moghalu, described the upward movement of the MPR as a ‘correct move’.

“Correct move by the Monetary Policy Committee to dramatically hike the MPR by 400 basis points. The situation calls for nothing less if we are to check inflation over 12 to 18 months. We did the same a decade ago to bring inflation from 14 to 8 per cent. It will hit businesses hard, but inflation is hitting harder. We must slay the inflation dragon lest it consumes our economy and we head to Zimbabwe/Venezuela. The money supply must be reduced. Price stability must take priority before economic growth in the current situation,” he stated.