By Rafiq Raji, PhD
Interest rate decisions by the Nigerian and South African central banks coincide this week. They are both likely to keep their benchmark rates unchanged when they announce them on 24 January. In Nigeria, opportunistic price increases for staple foods, transportation and fuels during the festive period together with a continued weak exchange rate contributed to pushing the annual inflation rate a little bit higher to 18.55 percent in December, from 18.48 percent in the preceding month. There are reports some of these price increases are yet to be reversed, especially those for kerosene and cooking gas, which rose even further this month. In South Africa, inflation accelerated further in December, coming out at 6.8 percent, 0.2 percentage point higher than November’s. The outlook suggests the headline would fall back within the 3-6 percent inflation target band of the South African Reserve Bank (SARB) from February at the latest, and likely for the remainder of 2017. Considering both economies are in dire need of growth, the central banks would cut rates if they could. The inflation trend and outlook constrain them, however. I suppose the Central Bank of Nigeria (CBN) would get the opportunity by mid-year, when the headline should be about 9 percent. Having set a very high bar for any potential relaxation of its current tight policy, the SARB would probably like to see a sustained easing of price pressures before taking the plunge.
Even so, emerging market central banks like the CBN and SARB may find external factors would matter more than domestic ones, in the first half of 2017 at least, as global market participants try to make sense of what are probably unprecedented uncertainties, in modern times at least, spurred by disturbing trends of nationalism and protectionism in key developed economies. America is expected to be increasingly insular under its new and volatile leadership. Political disruptions in Europe are likely, as Germany’s liberal chancellor, Angela Merkel, faces backlash for her pro-immigrant stance ahead of elections in September – albeit she is likely to keep her job – and the probability of one not so liberally inclined winning the French presidential election in April edges up. And then there is China’s incipient opportunism, already asserting itself ahead of an expected void in global leadership that a potential American absence under Trump would spur. The immediate consequence for key African economies would be the likely slowing of foreign portfolio inflows. Still, I imagine some of these fears would abate later in the year. Until then, key African central banks would best serve their economies by being prudent. Thus, I don’t reckon the SARB would even consider cutting rates until the third quarter at the earliest, by 25 basis points, say, to 6.75 percent. In the Nigerian case, the CBN would be loath to tarnish its already battered image any further, especially as the fiscal authorities seek funds from international financiers, who have been grossly disappointed by the poor management of the economy thus far. So even as one expect inflation to slow to single digits in the second half of the year, there might be little wisdom in cutting rates even then. My reckoning is that the CBN would keep its policy rate unchanged at 14 percent until June at least.
I have been a little astonished by recent commentary emanating here and there from the Nigerian intelligentsia that bizzarely seeks to rationalise the CBN’s foreign exchange restrictions. To allow the naira trade freely would be a recipe for chaos, goes one argument. Parallel market operators would necessarily impose a premium on their rates, it is also opined. I disagree. The instability argument about a market-determined exchange rate has been largely refuted by the recent success in Egypt, which devalued its currency, raised interest rates and cut subsidies to enable it secure a $12 billion 3-year loan from the IMF. The Egyptian pound has since returned to a path of stability, after the free-fall that initially greeted the authorities’ devaluation move. Better still, the second tranche of the IMF loan is set to be released in February. In contrast, Nigerian stakeholders have been bickering over the past two years on how to go about solving similar troubles. Little wonder, international financial institutions have been reluctant to play ball. The World Bank has refused to budge on the authorities’ loan request, pending clarity on planned reforms. Even the African Development Bank, which is favourably disposed to Nigeria, has applied the brakes on the second tranche of its $1 billion loan for the same reason. Thus, much needed funding to fill the gap in the budget and finance infrastructure projects are not likely to materialize until the authorities’ much touted Economic Recovery and Growth Plan is finalised, now scheduled for release in February, a 2-month delay. This potentially great but perennially foundering nation can ill afford such tardiness.
Also published in my BusinessDay Nigeria column (Tuesdays). See link viz. https://www.businessdayonline.com/cbn-sarb-keep-rates-steady/