Inflation rate is at highest level in more than decade
Nigerian economy probably contracted by 1.5% in 2016
After retaining its benchmark interest rate at 14 percent for the third time in a row and signalled it will leave its currency exchange rate unchanged despite competition from the far cheaper black market.
The Central bank expected growth to turn positive this year while inflationary pressures would ease and the currency would stabilise.
The Central Bank Governor Godwin Emefiele told reporters interest rate decision had been taken in light of headwinds facing the domestic economy and because of uncertainties in the global environment.
The decision, which was taken unanimously by the monetary policy committee, matched the view of most economists polled by Reuters last week.
Emefile said the bank would continue to intervene in the foreign exchange market to keep the official exchange rate to the dollar in line with its “expectations”.
“No need for anyone to panic,” Emefiele said, when asked about the spread between official and black market rates, and hard currency shortages.
Nigeria economy is struggling with its first recession in 25 years due low oil prices. Inflation, meanwhile, accelerated to a more than 11-year high of 18.55 percent in December.
In June, the bank had said it would float the naira but has since then kept the rate at around 305 to the dollar, some 40 percent above the rate quoted on the parallel market – where importers head as they struggle to get dollars through official channels.
“For now, the only clear takeaway is that there are no imminent plans for further FX liberalisation,” said Razia Khan, chief economist Africa at Standard Chartered Bank. “FX will continue to be rationed.”
Cobus de Hart, senior economist at NKC in Johannesburg, said rising oil prices would not be enough to end the spread between the rates.
“The strategy of supplying priority sectors with additional U.S. dollars will not serve to narrow the gap between the official and parallel market rates,” he said.
The central bank also kept its cash reserve ratios for commercial banks at 22.5 percent.
2017 Budget Spending
Nigerian President Muhammadu Buhari proposed a 20 percent increase in this year’s spending plans to stimulate growth and help the economy rebound after it probably contracted last year for the first time since 1991. The lower prices and output of oil, the west African nation’s biggest revenue earner, as well as shortages of foreign currency contributed to the economy shrinking 1.5 percent in 2016, according to the International Monetary fund. The lack of dollars and the end of a currency peg, which caused the naira to weaken by about a third and fueled a discrepancy between the official and black-market exchange rates, led to more inflation pressure.
“The absence of any further policy measures on foreign-exchange liberalization suggests that the CBN” is comfortable holding rates, Razia Khan, head of Africa macro research at Standard Chartered Plc in London, said in an e-mailed response to questions before the announcement. “Although inflation has been pressured higher, further tightening would be more plausible if there was some expectation that it might trigger a positive response from offshore portfolio investors, and bring about greater foreign-exchange inflows. These plans look to have been put on the back burner for the moment.”
With increased investment in power generation, roads, rail and ports, the government is targeting expanding the economy by 2.5 percent this year, and Finance Minister Kemi Adeosun has for months urged monetary policy makers to reduce interest rates to support growth efforts. Interest rates have been at a high of 14 percent since July as the central bank struggled to balance supporting a weak economy with fighting inflation that reached an 11-year high of 16.8 percent in December.
Inflation in 2016 was driven by food costs and pressure on consumer prices remain, Emefiele said. The central bank is conscious of the need to stimulate the economy, he said.
Shortages of foreign currency have sustained the black market, where importers of items from rice to diary products source dollars at rates about 30 percent higher than those on the official market. Vice President Yemi Osinbajo said last week that the disparity in the rates is concerning, and authorities are considering measures to close the gap.