Cautious hope for investors in Emefiele’s era
In his first speech since assuming office as the governor of the Central Bank of Nigeria (CBN) this month, Godwin Emefiele has signaled his policy objective of simultaneously cutting interest rates and maintaining the stability of the naira, which some analysts say may be difficult to achieve in light of the prevailing macroeconomic fundamentals.
Anchoring their skepticism on declining crude oil sales and the country’s unbridled appetite for imports, the analysts say the apex bank under Emefiele’s leadership may have pushed the bar a little too high in its determination to pursue these twin objectives.
“The CBN cannot have it both ways (i.e. lower interest rates/higher liquidity and at the same time a strong and stable currency), except there are other compensating measures on the trade account,” Babatunde Ojo, a US-based financial analyst said in an email to Daily Trust.
“As long as Nigeria’s economic structure is still largely dependent on oil proceeds for foreign exchange earnings, we cannot just abruptly reduce interest rates and expect no pressure on the exchange rate,” he added.
In practice, the widely held consensus is that central banks generally face conflicting objectives such that a trade-off between price stability (inflation) and output (employment) remains almost inevitable.
Last Friday, a day after Governor Emefiele’s maiden address, the naira hit a 2-month low, closing at N164.64 to the US dollar at the interbank market as investors apparently doubted the credibility of the announcement by the CBN to accomplish its goal of cutting interest rates and maintaining the stability of the naira at the same time. The heightened pressure on the naira prompted the governor to clarify his earlier announcement that the plans to cut the interest rate were not immediate, thus helping to calm the markets as the naira rebounded, closing at N162.90 to the US dollar Wednesday.
Notwithstanding, the plan to cut rates signals a departure from the contractionary policy regime of former Governor Sanusi Lamido under whose tenure the key rate was raised and kept at 12 percent, and inflation brought down to single digits. The former governor’s impressive record of fighting inflation and maintaining financial stability made him popular among international investors.
A macroeconomic analyst with one of the major commercial banks, who pleaded anonymity, told Daily Trust that Governor Emefiele’s approach to monetary policy appears to ignore the growing influence of foreign portfolio investors in determining the stability of the naira.
“I personally think he [Godwin Emefiele] needs time to adjust and learn how things work at the CBN. I think he’s not very vast with economic policy making and therefore would need a lot of guidance and patience from investors.”