To break the vicious cycle of inflation and low growth, there is a need to adopt structural reform that would support economic growth and mitigate the impact of monetary policy changes.
According to analysts at Agusto &Co, besides creating structural reforms, efforts should be geared towards targeting interventions, in addition to investments in critical infrastructure and promoting non-oil exports to promote diversification and resilience.
In its monthly report, ‘Beyond the Hike: Nigeria’s Multifaceted Fight For Stability’, the analysts stressed the need for the government to take decisive actions towards boosting output to tame slowing gross domestic product (GDP) and rising inflation.
They noted that with the nation’s GDP growth slowing for two consecutive years amid high inflation, decisive actions are needed to boost output. However, the experts stated that broad-based and sustainable GDP growth is only possible in a low-inflation environment while low output and productivity are significant structural inflation-stoking factors in Nigeria.
GDP growth considerations have taken a back seat for the Central Bank of Nigeria’s (CBN), they said, noting that the ball now rests squarely on the fiscal authority.
The expert also argued that the recent CBN’s decision to stabilise the naira, following its plunge to an all-time low of ₦1900/$ at the parallel market on February 22, should ideally have preceded the decision to ‘float’ the naira.
According to them, the observation clearly underscored the importance of timing considerations in the implementation of monetary policies for optimal efficacy and resilience as many believe that proactive measures could have potentially mitigated the severity of the naira’s precipitous decline since June 2023.
On raising the cash reserve ratio (CRR) to 45 per cent, the experts said the threshold has placed Nigeria far above its regional peers (South Africa: 2.5 per cent, Kenya: 4.3 per cent and Ghana: 15 per cent).
They pointed out that banks’ loan growth will be constrained in 2024 due to the increased procurement of treasury bills prompted by higher yields, while the CBN has to face the task of proactively adopting a risk management perspective to navigate the implications of its newly-adopted hawkish monetary policy stance on the banking sector.
“Tighter monetary conditions typically mean lower access to credit at higher costs. The response from Nigerian banks has been a 300-500 bps increase in lending rates (which is pegged to the MPR). Businesses and consumers may face difficulties obtaining loans due to tighter lending conditions, potentially dampening economic activity and investment.
“Existing borrowers, many of whom are already grappling with rising production costs, threatening their viability and competitiveness, are likely to see their loan repayments increase, putting additional strain on their finances and potentially leading to defaults,” the experts added.
