IMF, Fitch welcome CBN’s interest rate hike

Multilateral institution declares Tinubu inherited difficult economy
•Insists Nigeria still capping petrol prices
•Rating agency: Lack of policy coordination remains risk to reform drive
•Projects inflation to average 26% in 2024

The International Monetary Fund (IMF) has said recent increase in Nigeria’s interest rate by the Central Bank of Nigeria (CBN) is a step in the right direction, stressing that President Bola Tinubu inherited a difficult economic situation from his predecessor.
In a similar vein, Fitch Ratings yesterday said the recent 400 basis points increase, to 22.75 per cent, in Nigeria’s Monetary Policy Rate (MPR) marked progress in the country’s effort to contain inflation.

The Monetary Policy Committee (MPC) of the CBN increased the policy rate by 400 basis points to 22.75 per cent for a total tightening of 1,025 basis points since May 2022.

IMF gave its verdict in its end-of-mission press release by the IMF staff team that recently visited Nigeria for consultations and assessment.
However, the organisation stated that the views expressed in the statement were preliminary findings of the mission, explaining that a report that would emerge from the visit would still be subject to management approval after presentation to IMF’s executive board for discussion and decision.

“The new government inherited a difficult economic situation marked by low growth, low revenue collection, accelerating inflation, and external imbalances built up over years,” the report stated.

But it pointed out that addressing food insecurity was the immediate priority, and said the recent approval of a well-targeted and effective social protection system remained an important step towards addressing the food crisis, stressing that implementation will be crucial.
The decision of the MPC to further tighten monetary policy, IMF said, will help contain inflation and pressure on the naira.

IMF said the team led by IMF Mission Chief for Nigeria, Axel Schimmelpfennig, visited Lagos and Abuja from February 12 to 23, to hold discussions for the 2024 “Article IV Consultations” with Nigeria. It said the team met with Minister of Finance, Wale Edun, Governor of Central Bank of Nigeria (CBN), Yemi Cardoso, and senior government and central bank officials.

It also consulted with the Ministry of Agriculture, Ministry of the Environment, and representatives from sub-nationals, the private sector and civil society.

Schimmelpfennig was quoted to have said at the end of the visit, “Nigeria’s economic outlook is challenging. Economic growth strengthened in the fourth quarter, with Gross Domestic Product (GDP) growth reaching 2.8 per cent in 2023. This falls slightly short of population growth dynamics.

“Improved oil production and an expected better harvest in the second half of the year are positive for 2024 GDP growth, which is projected to reach 3.2 per cent, although high inflation, naira weakness, and policy tightening will provide headwinds.

“With about eight per cent of Nigerians deemed food insecure, addressing rising food insecurity is the immediate policy priority. In this regard, staff welcomed the authorities’ approval of an effective and well-targeted social protection system.”

The team also welcomed the government’s release of grains, seeds, and fertilisers, as well as Nigeria’s introduction of dry-season farming.
It stated, “Recent improvements in revenue collection and oil production are encouraging. Nigeria’s low revenue mobilisation constrains the government’s ability to respond to shocks and to promote long-term development.

“Non-oil revenue collection improved by 0.8 per cent of GDP in 2023, helped by naira depreciation. Oil production reached 1.65 million barrels per day in January as the result of enhanced security.”

But the IMF insisted that Nigeria was still paying subsidy on petrol. The federal government and the Nigerian National Petroleum Company Limited (NNPC) had said there was no capping for the fuel, which had remained relatively low compared to diesel, kerosene, jet fuel and others. The latter are currently sold above N1, 000 per litre, while petrol remains at between N600 to N700 per litre.

The IMF team stated, “The capping of fuel pump prices and electricity tariffs below cost recovery could have a fiscal cost of up to three per cent of GDP in 2024.

“The recently approved targeted social safety net programme that will provide cash transfers to vulnerable households needs to be fully implemented before the government can address costly, implicit fuel and electricity subsidies in a manner that will ensure low-income households are protected.

“This decision should help contain inflation, which reached 29.9 per cent year-on-year in January 2024, and pressures on the naira.”
On its part, Fitch Ratings, yesterday, supported the monetary policy tightening by the CBN.

In a report, the rating agency said it would also support a more market-determined exchange rate, even though real rates remained negative and the exchange rate was still subject to downward pressure for now.

Earlier in November 2023, Fitch had highlighted low net reserves and weaknesses in the exchange-rate framework as constraints on the sovereign’s credit profile and then affirmed Nigeria’s rating at ‘B-’ with a Stable Outlook.

However, in its latest release, the agency said the large MPR increase on 26-27 February, and accompanying moves to raise the cash reserve ratio for commercial banks to 45 per cent, from 32.5 per cent, were steps towards containing inflation.

It reiterated that CBN also widened the asymmetric corridor around the MPR, which could limit interest rate pass-through.

The report said, “Fitch expects the CBN to continue tightening policy in the near term, which seems necessary to more fully control inflation as rapid credit and money-supply growth suggests a still-loose monetary context.

“Such a tightening will still face implementation challenges, partly due to the potential for countervailing political pressure. However, without further sizeable monetary tightening, it may be difficult to achieve macroeconomic stability – real interest rates remain negative, deterring inward portfolio investment.”

Fitch also projected the rate of inflation to rise further in the first half of 2024 (1H,24), before moderating in the second half (2H,24), partly reflecting base effects as well as its assumption that the naira’s depreciation will slow in 2024, compared with 2H,23, before a stabilisation of the currency by year-end.

It stated that the currency’s sharp depreciation since mid-2023, including the large loss of value in January, and slow monetary policy response had raised inflation expectations.

Fitch said with security challenges in the North-east of the country and higher transport costs also adding to price pressures, it was forecasting inflation to average 26 per cent in 2024.

Recent CBN policy tightening, coupled with exchange-rate adjustments, it said, signalled initial efforts to address foreign exchange (FX) scarcity and restore business confidence.

Fitch stated, “The CBN governor has announced plans to clear a backlog of unsettled FX forwards ‘in the next few days’, having settled only $400 million of an outstanding $2.2 billion, based on CBN estimates, as of late February.

“Nonetheless, the CBN’s weak net reserve position will continue to hamper liberalisation of the FX market and we expect FX scarcity to persist through 2024. Even if the authorities resolve the backlog of FX forwards, it will take time for investor confidence in the FX market to return, especially if transparency over exchange rate and monetary policy remains poor.”

According to the report, recent measures, if continued, may ultimately strengthen the sovereign’s medium-term growth prospects and capacity to attract external financing.

Fitch said when it affirmed Nigeria’s rating in November last year, it stated that improved credibility and consistency in monetary policymaking and FX management, resulting in a sustained reduction of inflation and distortions in the FX market, could lead to positive rating action.

The report added, “While the authorities are taking steps to address the challenges in the monetary and FX market, years of unorthodox policy approaches and financial repression under the previous government have weakened investor confidence in the economy.

“A lack of policy coordination remains a risk for the reform drive. Notably, Fitch expects fiscal consolidation to be limited in the near term, constrained by political pressure on the government to improve infrastructure and provide support to households amid high inflation. This could weaken the effectiveness of policies designed to curb inflation and improve FX liquidity.”