Shrinking GDP, Surging Prices to Keep Nigerian Rates on Hold

  • Inflation remained outside government target band in February
  • Central bank has kept key policy rate at 14% since July

Faced with a contracting economy, surging inflation and a rigid exchange rate, Nigeria’s central bank will have little choice but to keep its key interest rate unchanged on Tuesday.

The Monetary Policy Committee led by Governor Godwin Emefiele has held the policy rate at 14 percent since July and is unlikely to make a change, according to all 17 economists and analysts surveyed by Bloomberg.

Foreign-exchange policy has become a common agenda-item for the committee as the nation maintains a managed currency float and has stopped importers of goods it deems non-essential from buying dollars on the official market. While this has contributed to a rapid increase in consumer prices, Emefiele said on March 11 that allowing the naira to freely float will hurt the economy, which shrank by 1.5 percent last year, the first contraction since 1991.

“They won’t cut because inflation remains high, and they won’t hike because that will undermine growth,” Yvonne Mhango, an economist at Renaissance Capital, said in an emailed response to questions. They will only “adjust upwards, if they allow for more flexible foreign-exchange policy that results in the naira weakening.”

Limited foreign currency available to import motor fuel and food contributed to inflation accelerating to the highest rate in more than 11 years in January. While price growth slowed for the first time in 16 months to 17.8 percent in February, it’s outside the government’s 6 percent to 9 percent target.

Economic Blueprint

The government released an economic blueprint earlier this month that aims to lift the annual economic growth rate to 7 percent and reduce the inflation rate to single digits by 2020. Proposals such as cost-reflective electricity tariffs and allowing a market-determined exchange rate could add to price pressures, even as plans to boost the output of rice to cashew nuts may reduce the cost of food, according to Lagos-based FSDH Merchant Bank.

More food production “will dampen food prices, which may lower the inflation rate,” FSDH said in an emailed note. However, “the imminent increases in the electricity tariff” and gasoline price will curb the deceleration of inflation, it said.

The Central Bank of Nigeria has regularly sold dollars to keep the naira between 305 and 320 against the greenback for at least the past four months after abandoning a 197-199 peg in June. Foreign-currency sales have helped the naira gain on the black market to about 440 per dollar compared with a record-low of 520 last month.

“Postponing the all-important foreign-exchange policy decision will continue to exert an unnecessary burden on the Nigerian economy,” Razia Khan, head of Africa macro research at Standard Chartered Plc in London, said in an emailed note. “The cost is high.”

S&P Global Ratings spared Nigeria a downgrade by affirming its B assessment, five levels below investment grade, with a stable outlook on March 17. Increased oil production and capital expenditure by the government will help the West African nation’s economy expand by an average of 3.4 percent a year between 2017 and 2020, S&P said.

Last year’s contraction was due to a drop in the price and output of crude oil, the nation’s biggest export. The economy may recover and expand by 2.2 percent this year, partly driven by increasing crude production, according to the government’s four-year plan.

“Although both the inflation rate and foreign-exchange rate have shown signs of improvement in the last few weeks, a change in monetary policy might be too soon,” FSDH said. “We believe more time is required.”

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