…Adedipe suggests rates hike to boost investment, curb inflation
By Temitope Adebayo
As the Central Bank of Nigeria (CBN) sets for its first Monetary Policy Committee (MPC) meeting next month, various industries stakeholders and Nigerians at large may need to wait a little longer before witnessing a lowering interest rates, as the Apex bank would only do so after achieving its 2024 inflation target of 21.4 per cent.
This is even as Dr. ‘Biodun Adedipe, Chief Consultant of B. Adedipe Associates Ltd., has advised the Monetary Policy Committee of the Central Bank of Nigeria (CBN) to raise the Monetary Policy Rate (MPR) to increase the real interest rate and encourage investment.
Speaking on a likely lowering of benchmark interest rate next month by the CBN, the Apex Bank’s deputy governor, Economic Policy, Muhammad S. Abdullahi, while speaking in Lagos on Tuesday, expressed confidence that the implemented monetary and fiscal policies will lead to a relaxation of foreign exchange constraints in the foreseeable future.
Abdullahi, who was represented by Director, Monetary Policy Department, CBN, Muhammed Tumala, said: “Inflationary pressures may persist in the short-term but are expected to decline in 2024. The recently introduced inflation-targeting policy of the Bank is expected to rein-in inflation, which is projected to decline to 21.4 per cent, following the crystallization of Government reforms, despite its persistence in 2023.
“Food inflation is expected to decrease due to improved agricultural productivity. The expected deceleration will largely reflect the base effect of Government reforms in energy and the easing of global supply chain pressures. This would boost consumer confidence and purchasing power, benefiting businesses across board.
“The CBN will then adjust its policy rate in response to inflation trends, and a decrease in inflationary pressures can prompt a more accommodative monetary policy. Lower interest rates mean that the cost of borrowing for businesses decreases, making capital more accessible. This, in turn, can stimulate investment, businesses, fuelling growth and job creation”.
Stating that the CBN’s decision to adopt the inflation-targeting framework to achieve its core mandate, he said: “Inflation targeting involves using monetary policy tools such as the policy rate to achieve a specific inflation rate within a targeted range. The aim is to maintain price stability, which is crucial for human welfare, businesses and sustainable economic growth.
“The CBN’s approach in achieving price stability for businesses in an inflation targeting regime will involve a combination of clear communication, use of monetary policy instruments, and collaboration with fiscal authorities, amongst others. For instance, clear communication of this target is vital for business as it shapes expectations, influences investment decisions, and guides economic planning.
“These Inflation targeting initiatives will contribute to overall economic stability, fostering market confidence. Stable economic conditions will positively influence consumer behaviour. Businesses can thrive in an environment where consumers feel secure and confident in the economy.”
READ ALSO: Aviation Unions Commend Keyamo Over Relocation of FAAN.
On the exchange rate regime, he said, the major policy thrust of the CBN is the pursuit of a flexible exchange rate regime that has resulted in the unification of the foreign exchange market into a single window.
“Also, the bank has reverted to the conventional monetary policy approach with a focus on attaining price stability, which fosters sustainable economic growth for Nigeria. The importance of low and stable inflation for businesses cannot be over-emphasised.
“Therefore, it is important to note that the anticipated stability in the foreign exchange market would not only be attributed to a substantial reduction in the country’s petroleum products importation by 2024, but also to the recent market determined exchange rate policy of the CBN. Staff estimates reveal that exchange rate pressures is expected to decline significantly in 2024,” he pointed out.
He reiterated that the recent exchange rate reform, which aims to streamline and harmonise multiple exchange rates, plays a crucial role in eliminating distortions and uncertainties in the foreign exchange market.
Noting that the unification aligns with global best practices, promote transparency and reduce arbitrage opportunities, which had previously existed in the fragmented exchange rate system, he said: “A consistent and stable exchange rate not only bolsters investor confidence, signalling a commitment to market-driven policies, but also acts as a powerful magnet for foreign investment. This streamlined approach ensures a smoother operation of the economy, enhancing Nigeria’s attractiveness to global investors seeking stability and clarity in currency valuations.”
Other considering factor, he stated, would spur the economy is the increased allocation to Small and Medium Enterprises Development Agency of Nigeria (SMEDAN).
He said: “Like a builder, the 2024 budget lays bricks for the future, prioritising critical infrastructure and human capital development. We have seen allocations for education, healthcare, infrastructure and other key sectors of the economy geared toward human development and growth.
“In terms of allocation, there is increased Government focus in medium enterprises. For instance, allocation SMEDAN increased by 238.87 per cent to N19.79 billion in 2024, compared with N5.84 billion allocation in 2023. This shows Government commitment to growing the business sector.”
Meanwhile, Dr. ‘Biodun Adedipe, Chief Consultant of B. Adedipe Associates Ltd., has advised the Monetary Policy Committee of the Central Bank of Nigeria (CBN) to raise the Monetary Policy Rate (MPR) to increase the real interest rate and encourage investment.
Adedipe said this at the 10th National Economic Outlook, organised by the Chartered Institute of Bankers of Nigeria Centre for Financial Studies, in collaboration with B. Adedipe Associates Ltd., on Tuesday in Lagos.
The News Agency of Nigeria (NAN) reports that the meeting has the theme, “Implications for Businesses in 2024’’.
NAN reports that the committee will hold its first meeting on Feb. 26 and Feb. 27, since the CBN Gov. Olayemi Cardoso resumed office.
The MPC was last held in July 2023 and was presided over by Folashodun Shonubi, former Acting Governor of CBN.
He said that the current situation in Nigeria with a high inflation rate and low interest rates had led to a negative real interest rate, which in turn had been discouraging investment.
Adedipe, also the founder of the compay, said that this negative real interest rate occurs when the inflation rate subtracted from the interest rate results in a negative value.
Adedipe emphasised that economic growth and development rely heavily on investment, which is being hindered by the current conditions.
Adedipe, therefore, anticipated the committee to raise interest rates to address the issue and encourage economic growth.
He said, “inflation rate latest figure for December 28. 92 per cent, Monetary Policy Rate, 18. 75 per cent, that’s a real differential which when interpreted means negative interest rate.
“So ordinarily for any central or reserved bank in the world, they want to reduce that differential and move it more to a positive real interest rate in which case, that is what will incentivize investment. That is a typical approach to orthodoxy in monetary policy.
“So, if we look at that alone, then we should expect that monetary policy rate will be raised by the monetary policy committee which of course we have now a tentative agenda of its meeting commencing February this year.’’
Meanwhile, Prof. Ndubisi Nwokoma, Director, Centre for Economic Policy Analysis and Research, University of Lagos, told NAN in an interview that the monetary policy committee decisions were crucial in addressing these challenges.
The financial economist urged the MPC to take decisive action at its upcoming meeting to address the urgent issue of foreign exchange instability.
This, he said, could help control inflation and potentially pave the way for lower interest rates and economic stability.
Ndubisi said: “I think the MPC meeting is very important at this stage of the country’s development. Given the myriad of economic challenges in relation to inflation, interest rates, and exchange rate instability; the policy intervention by the CBN through the MPC is very critical.
“Most importantly, there’s the need to urgently stem the tide in the instability in the foreign exchange; this has strong pass-through effects on inflation and interest rates, among others.’’
Leave a Comment
You must be logged in to post a comment.