By Rafiq Raji, PhD
The monetary policy committee of the Central Bank of Nigeria meets this week, 21-22 March. A few weeks earlier, the CBN published a research paper questioning the relevance of inflation targeting in the Nigerian case. Some have interpreted this to mean the CBN may have decided to focus on growth as opposed to targeting just inflation hitherto. Not that the Bank did not already signal this when it cut the monetary policy rate by 2 percentage points to 11 percent in November 2015, a time when it was quite clear the inflation outlook was beginning to deteriorate. At the time, it had already been close to five months since headline inflation breached the 9 percent upper bound target of the CBN. Annual consumer inflation was 9.2 percent in June 2015. Nigeria’s National Economic Council chaired by the country’s vice-president would also be holding a retreat this week. The widely dubbed ‘emergency economic summit’ is scheduled for 21-22 March as well, coinciding with the CBN’s MPC meeting. Both meetings would be happening against the backdrop of recently released poor growth data and a change in the country’s ‘B+’ credit rating outlook to negative by Standard and Poor’s last week. The ratings agency cited Nigeria’s monetary policy as a major motivation for the negative outlook. This possibility was highlighted in this column on 24 February 2016, a lengthy piece that also decried the rather discouraging state of Nigeria’s 2016 budget, which is yet to be passed into law. Then, I said: “with monetary and fiscal policies in such shoddy form amid a continuing oil price slump and strained finances, S&P would likely put Nigeria on a negative outlook or even a downgrade in March.” Having now put Nigeria on negative outlook, S&P would likely downgrade the country’s rating in September, when the next assessment is scheduled.
It is not clear how much of this week’s deliberations at the authorities’ economic retreat would affect those of the monetary policy committee. But it is now quite palpable that the CBN needs to do something about rising inflation. Some argue the recent surge in the headline figure to double-digits (11.4 percent in February) is belated, as anecdotal evidence suggested much higher price increases had been observed hitherto. With inflation expectations now quite heightened, the CBN’s denialism is no longer tenable. That said, the temperament of this central bank would likely remain dovish. Year-on-year growth of 2.1 percent in the fourth quarter of 2015 was abysmal. Growth was 3 percent on average in the prior three quarters. Unfortunately, the growth outlook for 2016 is quite dim. Thus, the CBN is likely determined not to contribute to further deterioration in growth. It is probably reasonable to say the MPC may decide to keep the policy rate unchanged at 11 percent this week. Still, there would likely be at least one independent member of the committee who will point out that this is not the appropriate approach. The one staff member who would have reiterated the need for foreign exchange flexibility is currently under administrative suspension. Although this action is unrelated to his minority view among staff members of the MPC, it nonetheless means Governor Godwin Emefiele need not worry about any member of his team deviating from the official – albeit erroneous – view that current policy measures are appropriate. Frankly, analysts are probably guessing when they make their calls on this week’s MPC meeting. We have all probably been trying to be mind readers, considering it has been quite a while since the CBN made data-dependent decisions. In the rather absurd Nigerian case, the analyst faces a dilemma. Do you take a data-dependent view or try to read the ‘minds’ of MPC members?
I have decided to take a data-dependent view onward. Inflation is rising and would probably continue to rise. My forecast for annual inflation in March is 11.6 percent, a 1.1 percent month-on-month increase. The naira is overvalued and should be devalued. I have revised my naira forecasts accordingly. My end-2016 forecast for the exchange rate is 250, a 26 percent devaluation. Policy tightening is warranted. However, there is more than one mechanism through which that can be achieved. This CBN has shown a preference for unorthodox tools, especially the cash reserve ratio. So, the CBN could potentially tighten policy via the CRR. My expectation is that the Bank would be forced to reverse its current expansionary stance in the third quarter of 2016. The monetary policy rate could be 13 percent – 2 percentage points higher than the current level – by end-2016, in my view. Still, in the unlikely scenario that the MPC decides to increase the policy rate at its meeting this week, markets would certainly see this as a positive surprise. What markets really want, however, is for the naira to be devalued. Those who say that this is inevitable have a strong argument. S&P argues as much, expecting the naira would be devalued further in the not too distant future. My own forecasts assume potential naira devaluation could be as early as March, to 210 say, from 199 currently. Nigerian authorities continue to hope for a recovery in oil prices, however. Such a fatalistic and sub-optimal approach to macroeconomic policy has never bolstered confidence anywhere in the world or at any time in history. They are probably encouraged by the recent increase in the price of crude oil to the $40 area. As fundamentals do not support a sustained recovery, this is foolhardy. For clarity, a data-dependent policy move would be for the CBN to devalue the naira and hike its policy rate to tame inflation. I am however skeptical the Nigerian central bank would be so bold. But should it do so, that would be really just proper. Just proper.
Also published in my back-page column on BusinessDay Nigeria newspaper. See link viz. http://businessdayonline.com/2016/03/is-nigerias-central-bank-still-targeting-inflation/