Once again at the beginning of fourth quarter, the country’s Federal Reserve Bank; the Central Bank of Nigeria (CBN) raises the monetary policy rate (interest rate) to a new high of 12 percent from previously 9.25 percent. There is no surprise with the new hike knowing quite well that CBN has been aggressively engaged in the tightening measures of its monetary policy and assiduously mopping the monetary base liquidity. But the margin of the hike at 2.75 percent from the previous rate was astounding. The capital market was anticipating at least a 10 percent hike but the muscular CBN jumped interest rate to 12 percent.
The reason given by the Governor of Central Bank, Mr. Lamido Sanusi for the hike was to strengthen the relatively malleable Nigeria’s currency naira. Although naira is weakening but it is not necessarily in a dire straight either it is totally collapsing to require such a drastic hiking of the interest rate to 12 percent. Subsequently Naira responded and appreciated against dollar due to the aggressive move; it did rally in the market and closing good the next day after the hike of the interest rate.
Vanguard Newspaper reported that “naira opened at 157.40 against the dollar at the interbank, firming from Tuesday’s close of N158.90 and up six percent from the record low of 167.8 reached before the CBN imposed several monetary tightening measures at an emergency meeting on Monday.” It was reported that Central Bank of Nigeria (CBN) at auction market sold $519.67 million at price rate of N150 for a dollar. On the previous day before the recent interest rate hike $400 million was traded at N156.91.
Other than the strengthening of naira, the unmentioned reason for the interest rate hike might be to get the economy ready for the removal of fuel subsidies. The idea is to utilize the monetary tightening policy as bulwark from the eventual higher inflationary trends as the subsidies are removed. There is no doubt that inflation will spike momentarily for a short time as fuel subsidies become history. Although Sanusi’s CBN was mum on fuel subsidies as propelling force for 12 percent monetary interest rate, but the writing is on wall. The development buttressed that the removal of fuel subsidy is a sure banker and there is no more orbiting around it, the government has finally made up its mind.
But the move to fix naira from its fall by CBN is not sustainable for the ‘shock therapy’ cannot solve the problem of naira permanently. The Sanusi’s CBN appears to be riding on momentum rather on fundamental; Nigeria has a structural imbalance that the tickling by CBN is quite minuscule to make a long term impact on the monetary affairs of the country and the strengthening naira.
Nigerian economy is based on oil and such an economy without diversification lacks the strong fundamental to sustain a viable and strong currency. When Nigeria sits up and makes the necessary changes in the way she runs her economy, the malleability of naira can be checked. The reactionary posture by policy makers is not the panacea to the falling naira.
The source of foreign exchange to Nigeria’s economy is limited. The major source of dollar to the economy is through the export of crude oil and remittance coming from Nigerians in Diasporas particularly from North America. Another weakness in the economy is its inability to sustain or hold to those dollars flowing into the economy. This is because the economy and country lack the necessary infrastructures that can hold on to the dollars in the economy. Paucity of social infrastructures, poor security and underdevelopment contributes to capital flights. The country is unattractive to foreign investments and dollars.
The problem with Nigerian economy and particularly with Naira is akin to football team that never soccer a goal in matches and always loses due to lack of training and planning.
Although a team might have some good players but without training, planning and coordination it will never succeed. Nigeria has intelligent men and women but it has failed to map out a pragmatic and strategic framework to transform the nation’s economy.
Another thing sticking out with the 12 percent hike is the underpinning contradiction coming from CBN policy makers. The appreciation of naira will result in a sharp demand of dollar and CBN may not satisfy the demand. A contradiction that arises from the strength of naira is contrary to devaluation of naira that CBN is planning for near future. It is not logical to make naira stronger, simultaneously planning to devalue the currency in near future.
The withdrawal from the country’s foreign reserve to defend naira has lowered the Nigeria’s reserve from $31.75 billion at the end of September to $30.86 billion as of October 7. The battle to save naira is expensive to the country therefore Nigeria must look beyond monetary tightening measures.
Emeka Chiakwelu is the Principal Policy Strategist at Afripol Organization. Africa Political and Economic Strategic Center (Afripol) is foremost a public policy center whose fundamental objective is to broaden the parameters of public policy debates in Africa. To advocate, promote and encourage free enterprise, democracy, sustainable green environment, human rights, conflict resolutions, transparency and probity in Africa. http://afripol.org/ strategist@afripol.org