• According to the International Monetary Fund (IMF), global GDP growth is expected to slow to 3.2% in 2022 from 6% in 2021.
• The IMF estimates that during 2022-2023, 31 out of 72 economies with quarterly data will experience a technical recession.

• Despite rising oil prices occasioned by war in Ukraine, Nigeria’s oil production volume trended downwards for the most part of 2022.
• Actual government oil revenue was N395 billion from January to August 2022, 73% lower than the pro-rate figure of N1.46 trillion in the 2022 budget.

• Nigeria’s headline inflation rate increased to 20.77% (Y-o-Y) in September
• Key factors such as foreign exchange scarcity, increase in fuel prices in different parts of the country, higher transport costs and insecurity have continued to drive up prices of goods and services in the country

• In October, rate in the I&E Window fell by 1.4% to N443/US$, while the parallel market rate fell by 8.8% to N800/US$, creating a wide exchange rate premium
• We expect the pressure in the market to continue especially in view of the 2023 general elections and uncertainty surrounding foreign exchange policies.

• Inflation in Nigeria in the last few years has been driven by government policy actions, external factors and lack of adequate measures by relevant government agencies to prevent or limit inflation and its impact.
• Clear examples of these three cases include the closure of land borders in 2019; the impact of COVID-19 and the ongoing war in Ukraine; and insecurity.
• While the war in Ukraine continues to disrupt global supply chain and creates pressure on energy prices, the recent flood in Nigeria which affected 31 states has resulted in the death of over 500 individuals, partial or total damage of over 90,000 houses and damage of more than 140,000 hectares of farmland. This, along with exchange rate depreciation, is expected to heighten inflation in coming months.

Exchange rate

• Despite several initiatives by the CBN such as the RT200 programme, the increase in interest rates, clamping down on BDCs, and FX repatriation policies, the Naira vis-à-vis the Dollar keeps depreciating.
• The recent policy on issuance of new Naira notes has also intensified the currency’s depreciation. While the underlining problem with Nigeria’s exchange rate is limited FX inflows, we believe that policies by the apex are important tools that influence the movement of the Naira.
• Going forward, the goal must be to restore confidence in the market by ensuring policy consistency, clearing of FX backlogs and avoiding policies or implementation frameworks that create uncertainty.

• In October 2022, the Central Bank of Nigeria (CBN) announced that higher denominations of the Naira will redesigned and introduced into the economy from December 15, 2022 while commercial banks were directed to return existing denominations to the CBN.
• The CBN noted that as at the end of September 2022, N2.73 trillion out of the N3.23 trillion currency in circulation, was outside the vaults of commercial banks across the country.
• The policy move was motivated by the need to get more currency into the banking system in order to increase the efficacy of monetary policy, among other reasons cited by the CBN.
• The panic created by the policy increased speculative activities on the exchange rate, which has experienced rapid depreciation since the announcement of the policy.
• There are several underlining reasons why this policy move is significantly affecting the exchange rate.

• We hold the view that although the intentions of the policy are good, such a sensitive policy requires careful and detailed appraisal, especially in view of the economic realities of weak dollar inflows from investors, crude oil theft, huge pending dollar demand, rising inflation, flood, low financial inclusion, among other factors.We
• believe that if these realities were properly considered, perhaps, a careful approach would have been adopted to achieve the goals of the policy and at the same time prevent a free-fall of the Naira.

Increase in CRR

• The increase in Cash Reserve Ratio (CRR) to 32.5% implies further liquidity tightening for the banking sector. This is in line with the actions of many Central Banks across the world that continue to raise their benchmark rates and other policy rate to reduce money supply and address inflation.
• Specifically for Nigeria, the CBN also increased the MPR to 15.5%. Such rates hike is expected to limit the amount of money in circulation and could constraint the growth of credit to the private sector which stood at N40.5 trillion in September 2022. We also note that structural factors play a significant role in fueling inflation especially in Nigeria and these factors cannot be addressed using monetary policy instruments.