The monetary policy adopted by the Central Bank of Nigeria has impacted positively on Nigeria’s foreign exchange reserves but businesses are faced with high cost of borrowing, writes Okechukwu Nnodim

Economists and financial analysts have expressed varied views regarding  the determination  of the Central Bank of Nigeria to maintain its monetary tightening measures.

While some of the experts say that the CBN is on the right track, as its monetary policy has helped to  increase the country’s foreign exchange reserves to a 32-month high, others argued that the regulatory bank’s policies are harsh on the real sector.

Nigeria’s external reserves have been on the rise for about two months. As at Tuesday, the reserves had risen to $42.27bn, a development which some experts view as laudable, though counter-productive to the manufacturing sector.

Part of the measures was the 12 per cent Monetary Policy Rate, otherwise known as benchmark lending rate, adopted by the CBN. The Governor, CBN, Mr. Sanusi Lamido,  had noted that the policies of the bank were tailored at curtailing inflation and tightening liquidity.

The liquidity tightening, analysts said, was at odds with the reality of an uncertain global economic environment and the actions of regulatory banks of most emerging markets. They argued that central banks of most emerging economies pursued more accommodative policies in order to support domestic growth and rebuff the drag of the global economic landscape.

With respect to inflation, the monetary measures recorded some gain last month as the Nigeria’s consumer inflation eased for the third straight month to 11.3 per cent year-on-year in September, down from 11.7 per cent in August.

The National Bureau of Statistics noted that food inflation, the largest contributor to the headline index, rose slightly to 10.2 per cent year-on-year in September, from 9.9 per cent in August. The figures showed that core inflation dropped to 13.1 per cent year-on-year in September from 14.7 per cent the previous month.

NBS said the relative moderation in the headline index on a year-on-year basis for the month of September was largely attributable to the relative slower rise in the core index. This continued decline in inflation, some experts said, was as a result of the policies implemented by the CBN.

They noted that the rise in external reserves  spoke volumes of the gains of the tightening measures adopted by the bank.

Analysts at FBN Capital in a recent report noted that Nigeria’s external reserves increased by around $1.3bn, plus 3.1 per cent month-on-month, to $42.1bn as at 8 Oct .18.

“Since the beginning of August, official reserves have increased steadily on the back of the bank’s monetary tightening measures, aimed at curbing speculative forex demand,” they said.

FBN Capital noted the CBN’s policy of limiting banks from simultaneously accessing its lending window and participating in forex sales at its Wholesale Dutch Auction had been particularly effective. “Amid the wrangling over the ECA (Excess Crude oil Account) and SWF (Sovereign Wealth Fund), the trend in the reserves provides some comfort, at least.”

The analysts explained that despite high oil prices averaging $115 per barrel, total accretion to reserves in first quarter of 2012 was quite modest at $3.7bn. They noted that this compared with accretion of close to $6bn between Aug. 1 and Oct. 18.

They said, “Prior to the MPC’s pronouncement of July, average forex sales at each session of the WDAS had climbed to $340m in June. This dropped to $222m in late July following the MPC’s announcement of a 400bps hike in the cash reserve requirement for banks and a reduction in their net open position from three per cent to one per cent.

“The circular of August brought forex sales at the WDAS lower still to $173m. Benefits of the bank’s action include a slight appreciation of the naira versus the United States dollar to N155.7 on the WDAS and N157.4 on the inter-bank.”

Meanwhile, the Chief Executive Officer, Economics Associate, Dr. Ayo Teriba, told our correspondent that the policies showed that the financial sector regulator was mainly concerned about the foreign exchange market and not the economic growth of Nigeria.

He described the 12 per cent MPR as one that was “way so surprising,” and noted that the hike in interest rate had impacted negatively on the country’s output drastically.

Teriba  said, “The monetary tightening measures obviously show that the CBN is mainly concerned about the excess demand of foreign exchange and not just inflation; for if you hike rate because of excess demand of foreign exchange, what would it do to the growth of the economy?

“The interest rate hike as a matter of fact, will affect the local output growth and local employment growth negatively. So rather than raising MPR, they should ponder on how to use the gains from our oil proceeds to grow or absorb the shock in the foreign exchange.”

Teriba added, “This is way so surprising and we hope they get things right as it is not telling well on local manufacturers and even small businesses that use bank loans to finance some of their projects.”

A research professor and former acting Head, Economics Department, University of Lagos, Akoka, Prof. Kayode Familoni, noted that though the country had recorded some growth in reserves, the impact of the high MPR had not paid off on the larger economy.

He said, “The Federal Government needs to listen to the plight of local manufacturers and indigenous entrepreneurs with respect to the high interest rate regime of  the banks in the country. There is no way businesses will thrive and impact on your economy positively when they cannot access funds with ease.

“The lending rate is high and many entrepreneurs are not finding it easy. The foreign exchange reserves may be on the rise, but how has this helped local businesses? The government must consider all this if it truly wants to grow the manufacturing sector and increase output of micro, small and medium scale entrepreneurs.”

 Former President Olusegun Obasanjo, while delivering a speech in Lagos some months back, noted that the policies of the CBN were killing small businesses.

Obasanjo, at a roundtable advocacy forum organised by the Institute of Directors, Nigeria, in Lagos, said the way the CBN governor was fighting inflation by removing money from circulation was improper.

On the cost of doing business in the country, Obasanjo called on stakeholders and government agencies to rise up to the challenge so as to ensure business growth.

Source: Punch (written by Okechukwu Nnodim)