Nigeria's Unconventional Tools Make Policy Hard to Predict

  • Seven of 19 analysts in survey predict interest-rate cut
  • Lower rates will benefit government as it boosts borrowing

Nigeria’s central bank is confounding analysts with unconventional economic policies that are becoming difficult to predict.

While African central banks from Ghana to South Africa tighten monetary policy to protect their economies from plunging currencies, speculation is growing that Central Bank of Nigeria Governor Godwin Emefiele will reduce the benchmark rate on Tuesday for the first time in six years. Seven of the 19 economists surveyed by Bloomberg predict the rate will be cut by 50 basis points to 100 basis points, while the rest forecast it will stay at 13 percent.

“People are divided because they are starting to believe that decisions are being made devoid of any economic rationale,” Bismarck Rewane, chief executive officer of the Financial Derivatives Co., said by phone from the commercial capital, Lagos. “Some of the decisions being made now are made with political rationale.”

Despite a plunge in oil prices, Emefiele, 54, has resisted devaluing the currency this year, imposing foreign-exchange restrictions on imports instead to limit demand, a policy that’s been publicly endorsed by President Muhammadu Buhari and his deputy, Yemi Osinbajo. Lower interest rates will help support Buhari’s administration as it ramps up borrowing to fund the budget and compensate for a drop in oil revenue in Africa’s biggest crude producer.

“The central bank has been talking about the harmony between the monetary and fiscal policy so it only makes sense for them to ease on interest rates so as to allow the federal government to borrow much cheaper than previously,” Adewale Okunrinboye, a research analyst at Asset & Resource Management Co., said by phone from Lagos. He expects the policy rate will be cut to 12 percent.

Buhari asked lawmakers last week to approve a supplementary budget for this year that seeks to raise spending by 10 percent and increase borrowing by an additional 1.6 trillion naira ($8 billion).

Africa’s most populous nation relies on oil sales for about 70 percent of its revenue, which are also the biggest supplier of hard currency.

“We expect the CBN to remain on its unconventional path,” JF Ruhashyankiko, an economist at Goldman Sachs in London, said in an e-mailed note to clients. “Any further downward pressure on oil prices is likely to strengthen, rather than weaken, the case for such an unconventional path.”

Inflation in Nigeria, Africa’s biggest economy, slowed for the first time in almost a year in October to 9.3 percent, giving the central bank room to ease monetary policy. The bank’s goal is to keep inflation within a range of 6 percent to 9 percent.

Bond Yields

Emefiele may also have reason to lower the benchmark rate following a drop in market interest rates. The Monetary Policy Committee’s decision in September to reduce the ratio of deposits that commercial lenders must hold with the central bank to 25 percent from 31 percent boosted liquidity and fueled a rally in local Treasury bills and bonds.

Since the last MPC meeting, yields on the government bond due March 2024 have dropped 3.6 percentage points to 11.58 percent as of 5 p.m. in Lagos on Monday, while the yield on the 90-day T-bill has more than halved to 5.34 percent in the period.

Economists will monitor the MPC statement closely for any clues of a change in currency policy. The naira has remained virtually fixed at 198 to 199 per dollar since the central bank imposed the foreign-exchange restrictions in February, while central bankers in other major oil-selling nations, including Russia, Colombia and Kazakhstan, have let their currencies fall.

“The move lower in oil prices has put more pressure on foreign-exchange reserves,” Razia Khan, Standard Chartered Plc’s chief Africa economist in London, who is forecasting the benchmark rate will stay unchanged, said in an e-mailed note to clients. “Reports of a growing importer backlog of foreign-exchange demand calls into question the sustainability of the current foreign-exchange regime.”

The currency fell 0.8 percent to 197.50 on the interbank market as of 11 a.m. in Lagos on Tuesday.

The naira lost a fifth of its value from June 2014, after oil prices began sliding, to February, when the central bank imposed currency controls. Gross reserves have slumped 12 percent to $30.3 billion this year.

“The body language of both the fiscal and the monetary policy sides show that they do not want a devaluation now,” Okunrinboye said.

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