Given the trend that continued throughout 2011, the Central Bank of Nigeria (CBN) may be under the same inclination to rely majorly on monetary policy instruments to achieve its objectives in 2012.
In 2011, the CBN tampered with the monetary policy rate (MPR) about seven times as it struggled to keep the other rates within acceptable threshold. The less attractive inflation targeting stance gave way, expectedly, to moving the benchmark interest rate in order to achieve semblance of stability at the foreign exchange market.
even that stability was a tall order for the regulator. after trying severally to maintain the n150 to the dollar exchange ratio, the central bank eventually succumbed and shifted the band to between n155 and n160 in october. this was after the fixation to maintain the old band had depleted the foreign reserves, as over $28 billion was traded at the official foreign exchange window.
thus, during the course of 2011, the cbn achieved its target of single digit inflation figures for only the months of july and august, with inflation reaching its highest level in march at 12.8 per cent. this was achieved at the expense of the mpr and, ultimately, the exchange rate, as the former rose from 6.25 per cent at the beginning of the year to 12 per cent.
WHAT DIRECTION IN 2012?
it is against this scenario that the federal government is adopting an optimistic outlook for 2012, pegging the exchange rate at n155, the inflation rate at 9.5 per cent and hoping to achieve a drop in interest rate, all geared towards transforming the economy and stimulating job creation.
many analysts however do not share this optimism. according to a report by pricewaterhousecoopers (pwc), the global financial and management consulting firm, the inflation projection is overly optimistic considering the impact of several proposals that the government is currently pursuing. the report highlighted the removal of fuel subsidy as likely to have a knock on effect on prices of goods and services in the short to medium term. “similarly, the proposed vat (value added tax) bill (which if passed into law would increase the vat rate from 5 per cent to 10 per cent) would also make the inflation rate target difficult to achieve,” the report added.
other areas which the report cited as likely to have an impact on the inflation rate include the proposed increase in import duty on certain goods (such as rice and wheat) to encourage local production and encourage cassava bread, while the devaluation in exchange rate would mean higher domestic prices given that the economy is largely import dependent.
“we therefore expect that inflation rate would likely be higher than the 9.5 per cent target except if the government can fast-track some of the palliative projects including power generation, local refining and employment generation.”
NO SIGNIFICANT IMPACT ON INFLATION
central bank governor, lamido sanusi insists that removal of petroleum subsidy would not have significant impact on inflation. he said the percentage weight of transportation in calculating inflation rate is less than one per cent. “if you double the price of petroleum products today, it is a month-on-month increase in inflation of 2.5 per cent which will lead to annual increase of two per cent. for the rate of inflation to go up by four per cent, you will need to increase petroleum prices by 200 per cent.” according to him, the benefits derivable from petroleum subsidy removal will far outweigh the demerits of rise in inflation.
NO AGREEMENT ON INTEREST RATE
This submission is coming just as the minister for finance and the Central Bank are not in agreement as to the direction of interest rate in 2012.
While the minister, Dr. Ngozi Okonjo-Iweala is advocating a drop in interest rate in order to stimulate real sector growth, the Central Bank believes the rate may even rise depending on the movement in the other variables.
According to Razia Khan, Regional Head of research, Africa, at London based Standard Chartered Bank, monetary policy is likely to remain tight with frequent open-market operations and foreign exchange sales to the interbank market in order to limit spreads between market determined forex rates and the official Wholesale Dutch Auction System (WDAS).
“Further rate tightening is probable in the event of inflationary pressure stemming from government spending, the lifting of fuel subsidies, or continued pressure on the FX reserves,” she stated in her forecast for Nigeria released recently.
She said persistent interbank market weakness may trigger a widening of the +/-3 per cent band around the current WDAS mid-rate.
TACKLING CURRENCY SPECULATION
The PWC report warned that the current status at the foreign exchange market could encourage currency speculation, as measures by the CBN to stabilise the forex market may actually achieve the opposite.
These measures include the requests for oil and gas companies to use crude oil receipts to finance their foreign exchange needs rather than resort to the banking system to make payments for eligible transactions and the directive that companies should source for foreign currencies in the ‘autonomous market’ for the purpose of remitting dividends, repatriation of capital and so on.
“Such measures may stabilise the exchange rate at N155 in the official market, but may lead to a much higher rate and margin in the autonomous market thereby encouraging round tripping,” the report added.