November 9, 2023/CSL Research
In response to the nation’s rising inflation, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has raised the Monetary Policy Rate (MPR) by a cumulative 225bps in 2023. The MPR has been raised from 16.5% in January 2023 to 18.75% in July 2023. These hikes have been mainly aimed at curbing inflation.
The CBN’s tightening stance has however had a mixed impact on the Nigerian economy. While it may have moderated the accelerating hike in the Headline inflation which rose to 26.72% y/y in September 2023, it has also restricted economic growth. The resulting high borrowing cost has made it difficult for businesses to invest and expand.
The manufacturing sector grew modestly by 2.4% in 2022, reflecting the negative impact of CBN’s hawkish rendition, especially in the second half of the year. In fact, the sector contracted by 1.91% in Q3 2022, the first contraction since covid hit in 2020.
Though at a slower pace, the CBN has maintained its hawkish stance and the fortunes of the sector appeared to have worsened with the latest reforms of the new administration such as the fuel subsidy removal and the unification of the exchange rates at the various windows. Though the sector has shown moderate growth of 1.9% In H1 2023, we believe growth rate in the second half of the year will come in lower.
In our view, the prevailing high interest rate environment and the new reforms of the current administration will suppress growth in the non-oil sector while production in the oil sector has not improved as expected. This informed our decision to revise our 2023 real GDP forecast down to 2.8% y/y from 3.1% previously. Price pressures and the need to attract foreign portfolio investors (FPIs) have remained at the front burner for the monetary policy committee, as they have clearly prioritized these concerns over growth.
Though inflation is still rising, we do not believe the monetary authorities will be willing to raise the policy rate much higher than current levels given the new administration’s perceived bias for low interest rates.
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