Interest hike, declining production raise fear of worse stagflation
· At N614/$, demand for dollar increases at black market, says Gwadabe
NIGERIA’S economy risks worse case stagflation as most economists and financial experts have agreed that macroeconomic indicators have continued to spiral.
Naira has defied expectation that the foreign exchange market would be relatively stable after political parties' primaries, slumping to a record low of near N615/$ at the alternative market last week.
Commercial lenders have also adjusted loan pricing following the recent increase in benchmark interest rate to 13 per cent. The lenders have passed the increase in deposits to borrowers – a situation that has increased the cost of borrowing.
In a rare outcome, the interest rate hike had an instantaneous impact on the financial market. For instance, a six- month deposit rate increased by approximately 14 per cent in May to 5.68 per cent according to data provided by the Central Bank of Nigeria ( CBN). Other time deposits and savings witnessed a similar increase.
The cost of borrowing had increased ahead of the monetary policy rate ( MPR) hike. Lenders had started pricing the sudden sharp rise in the cost of diesel as part of the cost of loans. For example, April saw the maximum lending rate increasing by over 100 basis points, from 26.61 per cent in March to 27.79 per cent.
With marketers alerted of a further increase in the retail price of diesel amid rising uncertainty, political risk coupled with fear of global recession, President of the Association of Bureaux De Change Operators of Nigeria ( ABCON), Dr. Aminu Gwadabe has warned that Nigerians, whose real incomes have been worsened by rising inflation and naira depreciation, are yet to see the worst of hardship.
In a position statement he shared with media at the weekend, Gwadabe said the declining production and continued debasing of naira raise the risk of stagflation to a frightening level. This, he said, would have painful consequences for the masses.
With the World Bank downgrading global growth to 2.9 per cent, significantly lower than 4.1 per cent forecast by the
International Monetary Fund ( IMF) in January, Gwadabe said Nigeria has a limited fiscal space to maneuver the potential crisis ahead.
He said naira, even at N614/$, battles with enormous FX demand, a sign that the economy is far from achieving currency market stability.
The challenges, the ABCON boss said, are eroding the purchasing power of households.
"The biggest driver of inflation is the stubborn rise in food inflation. The average price level of the food basket rose by 1.13 per cent to 19.5 per cent in May from 18.37 per cent in April. This can be reversed by increased support for agriculture and government policies that support the sector," he said.
And to keep the economy afloat in the face of current challenges, Gwadabe called for improved local production and aggressive
growth of non- oil revenue sources to break the concentration risk of crude.
He said Nigeria's hu g e population and diaspora market could be explored to deepen dollar inflows to save the economy.
According to him, expanding the dollar receipt points through 5,000 bureau de change ( BDC) operators could help to deepen dollar inflows and significantly raise the country’s FX position.
Gwadabe argu ed t hat BDC remains one of the channels through which diaspora remittance funds are received and administered across the globe and that Nigeria cannot be an exceptio n.
He claimed that the BDCS are at the centre of the economic d evelopment of the country and that they have the capacity to attract needed capital to grow the ec onomy while deepening the FX market.
“Making BDCS one of the channels through which over $ 20 billion annual dias
pora remittances enter the economy will give depth to the FX market and boost BDCS operations. Nigerian BDCS operators have also identified the immense opportunities presented by diaspora remittances and want to play a greater role in attracting more foreign capital into the economy. The reason is remittances are known to help poor recipients meet basic needs,” Gwadabe said.
Also, he said the Race to $ 200 billion in FX Repatriation ( RT200 FX Programme) created by the CBN would increase FX inflow if well implemented.
He described it as an answer to achieving stable and sustainable FX inflow but called for the religious implementation of the scheme.
Gwadabe urged the CBN to liberalise the foreign exchange market and pay more attention to supply measures.