THE Central Bank of Nigeria’s (CBN) aggressive method of raising the monetary policy rate has failed to curb inflation because of the troubles faced in four key areas where the apex bank funds liquidity in the market.
A finance expert and development economist, Kelvin Emmanuel, who was the guest speaker at The ICIR Twitter space programme on Friday, May 19, listed the drop in crude oil proceeds, foreign direct investments (FDIs) and foreign portfolio investments (FPIs), issues of trade finance, and diaspora remittances as cogs in the wheel of the apex bank’s efforts at reining in inflation.
Nigeria’s headline inflation has reached a record high of 22.04 per cent, according to the April data released by the National Bureau of Statistics (NBS).
Emmanuel, at the programme, pointing out that proceeds from crude oil sales had dropped significantly, argued that the Federal government made the mistake of giving outright to companies crude oil he said should have been sold and paid to CBN’s account.
“The government said Nigeria was using 66 million litres of petrol per day, which I doubt,” he said.
According to him, because of the drop in FDIs and FPIs, companies were no longer bringing in money to Nigeria, resulting in a decline in foreign investments from about $4.4 billion to $568 million.
“If the gap between the official market rate and the parallel market rate is much, they can not price-risk. They cannot bring their money in and convert it to N426-N463/$1. What happens when they want to take it out?” he asked.
A raging issue as an instance is foreign airlines funds of over $717.4 million trapped in the country. The airlines have been finding it very difficult to repatriate their funds, as the CBN bickers.
On the issue of trade finance, that is, net export proceeds, Emmanuel said companies would not want to export goods worth millions of dollars to Nigeria because of foreign exchange palaver.
He explained that when investors bring in funds to Nigeria, the apex bank would make them convert it at the official importers and exporters window, maybe somewhere around N572/$1 against the N745/$1 at the black market rate.
He said this is because the central bank operates a “fixed pegged exchange rate mechanism, which is outdated” when it should have floated the naira and have one exchange rate window so that investors could know who and what they are dealing with.
The economist submitted that diaspora remittances now appear to be the only credible way for foreign exchange liquidity in the forex market.
“These are why investors are not bringing in their monies,” he said.
He asserted that if Nigeria would deal with the problem, it would witness an automatic turn-around in two to three months.
“You obey economic principles, you get the results. If we have to curb inflation, we need to bring foreign exchange liquidity back, and to do that we need to close the gap between official and parallel (black) markets.
“If this is not done, it becomes more expensive for people to bring stuff into Nigeria, where you will see an impact on inflation to increase yield curve, because inflation will keep going up and the MPC will keep adjusting the MPR along the 400 basis points,” Emmanuel maintained.
He further explained that as inflation keeps increasing, the cost of capital would keep rising until it becomes even more expensive for companies to borrow money to fund businesses.
Source: ICIRNigeria
