Rising inflation, CBN’s MPR hike seen causing naira volatility

BY Business a.m.

An inflation rate that has shot above the roof, the decision to hike monetary policy rate by the Central Bank of Nigeria (CBN) and the downturn in the overall economy that has led to slow economic growth with consequences for middle- and low-income earners, have conspired to compound the volatility of the naira.

Aminu Gwadabe, a currency trader, foreign exchange expert and president of the Association of Bureaux De Change Operators of Nigeria (ABCON), who offered this analysis, said the volatility of the domestic currency is happening despite various foreign exchange interventions by the CBN.

Gwadabe said at the weekend that the unfolding scenarios raise the risk of stagflation with potentially harmful consequences for the poor within the economy, citing that already, global growth is expected to slump from 5.7 percent in 2021 to 2.9 percent in 2022 – significantly lower than 4.1 percent predicted by the International Monetary Fund (IMF) in January.

To keep the Nigerian economy going strong in the face of these challenges, Gwadabe called for improved local production and diversification of the economy from oil. He said the naira exchanges at N614/$1 at the parallel market, dollar bids continue to rise as inflation rose to 11-month high of 17.71 percent in May and emphasised that these occurrences 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 percent to 19.50 percent in May from 18.37 percent in April. This can be reversed by increased support for agriculture and government policies that support the sector.

“Nigeria’s huge population and diaspora market, which attracts an average of $20 billion annually, can be explored to deepen dollar inflows to the economy. Expanding the dollar receipt points through over 5,000 Bureaux de Change operators can deepen dollar inflows and significantly raise Nigeria’s forex position,” he said.

In his assertions, globally, BDCs remain one of the channels through which the Diaspora remittance funds come into countries as they remain at the centre of economic development and have the capacity to attract needed capital for the development of the Nigerian economy and deepening of the forex market. For the association, they believe the success of BDCs will be boosted by access to multiple streams of forex earnings to deepen the market, keep the naira stable and boost BDCs operations.

“Making BDCs one of the channels through which over $20 billion annual Diaspora remittances enter the economy will give depth to the forex market and boost BDCs operations. Nigerian BDCs operators have also identified with the immense opportunities presented by Diaspora remittances and want to play a greater role in attracting more foreign capital into the economy. Reason being that remittances are known to help poorer recipients meet basic needs, fund cash and non-cash investments, finance education, foster new businesses, service debt and essentially, drive economic growth,” Gwadabe explained.

Lauding interventions by the CBN, Gwadabe said the efficient implementation of the “RT200 FX Programme”, which stands for the “Race to $200 billion in FX Repatriation” policy of the apex bank announced in February will boost forex inflows to the economy. He said the programme is a set of policies, plans and programmes for non-oil exports that will enable Nigeria attain its lofty yet attainable goal of $200 billion in FX repatriation, exclusively from non-oil exports, over the next three to five years and as such, stands as one of the strategies that can help Nigeria earn more stable and sustainable inflows of foreign exchange.

Speaking on inflation, he said although the CBN recently demonstrated greater commitment to combat inflation by raising the Monetary Policy Rate (MPR) by 150 basis points to 13 percent, the strengthening of the economy through local production will reverse negative trends in the economy. He explained that as inflation rate remains higher than interest rates, returns on investment will drop and foreign capital inflows will fall leading to sluggish economic growth.

Gwadabe, therefore, urged the CBN to liberalise the foreign exchange market, ensure paradigms shift from demand to supply measures, support SMEs infrastructure and joint venture finance, promote skills awareness for operators, ensure more collaborations among stakeholders and make industry-friendly policies for the good of the economy.