Nothing seems to be stable anymore in the country. Economically speaking, that is, asgovernment and other regulators are having sleepless nights trying to prevent the situation from going from bad to worse, with major economic performance indicators looking bad. These economic indicators tell a discerning mind how healthy and stable the economy is.
For instance, the battle to bring inflation under a single-digit level was a difficult task, one achieved after the Central Bank of Nigeria (CBN) tweaked some other areas. But the euphoria was short-lived.
To over-flog the issue, the growing ‘army’ of unemployed Nigerians - a huge social problem - needs some attention, as well.
The government will want people to believe and see these things differently. That will give the euphoria that all is well. But the biting hardship high cost of living may have put lots of people in, among others will make it difficult for the people to be convinced otherwise.
when the authorities, for instance, acted to rein in the naira, it tweaked the interest rates, so as to discourage people from taking loans to buy dollars for whatever reason – either for imports or round-tripping.
These ‘tweakings’ were usually effected through monetary policies , and according to the former director, trades and exchange department,CBN,Dr. Omolara Akanji, this is a deliberate use of instruments by monetary authorities to influence the supply, availability and cost of money/credit to achieve set, broad economic objectives.
Macro-economic objectives include low and stable inflation, healthy balance of payments, full employment, and sustainable economic growth/development, among others.
There are four basic channels of monetary policy transmission, namely: interest rate channel, exchange rate channel, asset price and credit channels
But while that ‘noble decision’ is taken in the interest of the economy, the ordinary Nigerian who is not involved in the complex deal of foreign exchange trading, will now find it difficult to access funds, which have been priced out of his reach.
For instance, the Monetary Policy Committee (MPC) sets the policy rate which affects short-term interest rates which also affects economic activity and inflation through exchange and interest rates,as well as credit channels.
“This link is what is referred to as the transmission mechanism of the monetary policy. Basic link between MP and the economy is through the market for bank reserves or the money market,” said Akanji.
A change in the official rate explicitly influences the movement of other short-term rates in the same direction (even if some are slow to adjust).
The impact on longer-term interest rates are influenced by an average of current and expected future short-term rates. Therefore, the outcome depends upon the direction and extent of the impact of the official rate change on expectations of future path of interest rate.
Changes in the policy rate influences the overall level of the economy’s expenditure. The policy rate affects all others in the economy, the price of financial assets and the exchange rates, which all affect consumer demands in a variety of ways.
Monetary policies have far-reaching impacts on financing conditions- not just costs, but also the availability of credit, and banks’ willingness to assume specific risks, among others.
It also influences expectations about the direction of economic activities and inflation in future, thus affecting the prices of goods, asset prices, and exchange rates, as well as consumption and investment.
A monetary policy decision that cuts interest rates, for example, lowers the cost of borrowing, and results to higher investment activities and the purchase of consumer durables.
In a low interest-rate regime, stocks become more attractive to buy, raising households’ financial assets. The resultant wealth effect may also contribute to higher consumer spending, and makes companies’ investment projects more attractive.
Low interest rates also tend to induce currency depreciation if demand for forex increases over time and vice versa.
“The combination of these factors raises investment and consumer spending, as well as output and employment,” said Akanji.
A change in the official policy rate is immediately transmitted to short-term money market rates. However, credit rates may not always move by the exact amount of the official rate change.
Under credit channels (balance sheet and bank lending channels) the bank plays two roles - they create money and make loans (maturity transformation). Monetary policies can affect investment, only through its effect on interest rates and on the supply of bank loans.
Tight monetary policies lead to a drop in bank credit, which has large negative impact on economic activities and vice versa.
Policy-induced changes in interest rates do influence exchange rate. However, the impact on exchange rates of an official interest rate change is uncertain, as it depends on expectations about domestic and foreign interest rates; preference for domestic and foreign assets; and inflation expectations which may be affected by a policy change.
The CBN is particularly facing a hard time with the foreign exchange (forex) market. For instance, the Nigerian forex market is a price discriminating system in which the CBN is the main supplier. This causes the market to suffer structural defects which are, inturn, exploited by operators who have raked in huge trading profits. Unofficial estimates suggest that between 15 and 20 percent of the volume of forex traded in Nigeria is from autonomous sources that find their way into the parallel market.
The apex bank is now faced with a heightened and more daunting challenge - managing the exchange rate. Declining external reserves and a divergence in the forex market exchange rates has increased pressure on the CBN.
The CBN has recently amended the guidelines, making forex demand for airlines ticket revenues repatriation and or proceeds illegible at the weekly WDAS. forex demand for oil importation by operators who have existing SWAP agreements with the NNPC is also prohibited. The impact of re-routing Forex demand by the two groups to autonomous sources is expected to be felt in the parallel and inter-bank market. Both groups make up 32.1 per cent of the total forex demanded at the WDAS in August 2011.
This has had an immediate impact on the market, as demand has dwindled in recent weeks. Indications from the other market segments point to the fact that demand is being re-routed to the interbank and parallel markets.
“Central banks, during speculative attacks, normally effect interest rate hikes to stabilise the currency in the short-run. The fear is that the CBN may have to reverse some of their previous decisions, as pressure from the market mounts,” said Bismarck Rewane in the November edition of his ‘Economic’ publication.