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Nigerian Central Bank’s economic package is “too tiny to matter”

By Oluwatosin Adeshokan
Posted on Friday, 20 March 2020 08:38

Nigeria's Central Bank Governor Godwin Emefiele.
Nigeria's Central Bank Governor Godwin Emefiele. REUTERS/Afolabi Sotunde

The response of Nigeria's cental bank to the coronavirus pandemic shows the scale of the problem has not yet been grasped.

Between the global coronavirus pandemic and the oversupply of oil by Saudi Arabia and Russia, Nigeria’s economy is taking a battering.

As the price of crude oil went below $30, the naira was hit by more selling.

The central bank announced six policy responses.

  • Extension of moratorium on loans.
  • Reduction of interest rates from 9% to 5%
  • Creation of a N50bn [130m euro] fund to support the economy.
  • Credit support for the healthcare sector.
  • Regulatory forbearance.
  • Strengthening of the loan-to-deposit rate policy.

But economists and policy experts believe the CBN fails to address the more essential problems of the economy.

READ MORE: Nigeria needs managed depreciation to limit coronavirus, oil double whammy

The Nigerian economy has many fundamental problems, and it is feared that the interventions announced by CBN will do nothing to fix them in the long term. The announced policy intervention does nothing to allay fears, particularly with regards to the naira.

According to Adedayo Bakare, an economist and investment researcher at Afrinvest, the CBN is not addressing issues in the foreign exchange markets or the problems local industries currently have in accessing forex to go about their business.

  • “The measures the CBN has announced are fiscal policy adjustments that the minister or ministry of finance should be taking,” he said. “Their core functions are being ignored. The restrictions on FX are not addressed, the interventions are too tiny to matter.”

There are a few wins, like restructuring of loans around oil and gas and manufacturing. But the CBN changes seem minor.

READ MORE: How coronavirus and the global oil price war can impact Nigeria

Historically, Nigeria’s central bank has been too slow to deal with problems. For some experts, this is the perfect time to devalue the currency and restructure the economy.

But the CBN vehemently claims that market fundamentals do not support such a move.

  • According to Isaac Okorafor, the CBN’s director of corporate communications, said the bank has begun a “robust and coordinated” investigation in collaboration with the Nigerian Financial Intelligence Unit (NFIU) to uncover the “unscrupulous persons and FX dealers” who are creating the panic.
  • This could led to charges for “economic sabotage,” he said.

Budget cuts ahead?

Instead, the government response has been to propose a 1.5 trillion naira budget cut (around $5bn).

  • A record $35bn budget had been adopted in December

A sustained slump threatens to take Nigeria back to its recession in 2016.

Bakare explains that this is the best time to devalue the currency and start over from scratch.

  • “Global oil prices are low and threaten to go lower still,” he pointed out. “The country has seen withdrawals of foreign money from the open-market operations (OMO) and bond markets. The central bank needs to go back to the drawing board because the two primary sources of money for the country are currently not at a good enough level.”

Bottom Line: Nigeria’s fund may be to small to meaningfully support the economy – and an opportunity to devalue the currency is being missed.

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