One year on! Naira stability still elusive despite Tinubunomics policy adjustments — Agora Policy Note

• Fundamental economic policy misalignment

• $ illiquidity hinders CBN’s ability to manage FX

• “It’s the economy, stupid” hits Nigerians

PHILLIP ISAKPA IN LONDON, UK

One year after the whirlwinds of Tinubunomics swept the Nigerian political and economic landscape with a swathe of monetary policy adjustments, Nigerian currency, the Naira, has failed to find stability, a policy paper  prepared by Agora, the public policy think tank, reviewing the monetary policy of the President Bola Ahmed Tinubu administration, and released today, has shown.

The release of the monetary policy review under Agora’s Policy Note series, is part of a series in which the think tank is reviewing key policy areas under the Tinubu Presidency in the last one year. 

The Agora Policy Note on monetary policy has been released when it is just nine days away before President Bola Ahmed Tinubu rolls out the drums to mark his first year in an office for which he went all out with the huge claim of e mi lo kan (it’s my turn), and which, for effect, in the run up to the presidential election, he quipped about ascending political power, “snatch it, grab it, and run with it.” 

For tens of millions of Nigerians, it would not be a celebration, for the president isn’t running yet, and because they know, “It’s the economy, stupid” is hitting them hard.

According to Agora, at the dawn of the Tinubu administration, the Nigerian economy grappled with a fundamental economic policy misalignment occasioned by the shocks in the external environment and complicated by an unorthodox economic policy posture which sought to deny the existence of the realities on ground. 

But it noted that instead of helping to stabilise and rectify the cause of the macroeconomic imbalances, “monetary policy had devolved into an arcane and byzantine realm which had inspired zero confidence from households, businesses, and the international community.”

The Agora note on Tinubu’s monetary policy in the last one year specifically found that reviewing the first key area to observe policy effects, which is exchange rate, it concluded that “despite several interventions in the form of policy adjustments (fixed to floating), large interest rate hikes (+600bps) to cultivate USD [dollar] inflows, a step-up in the frequency of circulars and numerous rounds of FX market interventions, Naira stability remains elusive.”

It described the actual execution of monetary policy under President Tinubu as a return to conventional settings with a hawkish posture by the Central Bank of Nigeria (CBN) as the antidote to elevated inflation and naira weakness. This position came after nearly eight years of the naira exchange rate being hand-held by the CBN, Agora stated in its review. 

The review faulted the manner the desire by the administration to return to conventional setting of exchange rate management was handled.

Agora said: “The move to jettison the practice without any appropriate policy qualifiers or administrative guidance contrasts sharply with the views expressed in the president’s manifesto about unrestrained financial markets.”

It observed what seemed to suggest a lack of preparedness on the part of the administration when taking its early monetary policy decisions with regards to inflation and exchange rate.  

According to the Agora monetary policy review of the one year of the Tinunu presidency, “The unexpected announcement of the adoption of a less rigid exchange rate framework with limited restrictions on pricing without a line of sight on potential dollar flows would prove to be the undoing of the shift to a liberal foreign exchange regime.”

The Agora review criticises this move stating that “it would appear that CBN’s monetary policy actions are merely cosmetic without direct attempts at raising dollar liquidity to stabilise the supply picture.”

It, however, conceded that one important area in which the CBN  achieved a pass-mark was the unification of the official and parallel market exchange rates, one of the key deliverables on monetary policy in President Tinubu’s inauguration address of 29th May 2023.

But notwithstanding this achievement, Agora stated that given the centrality of the naira depreciation in driving inflationary pressures, “a low score on the currency translates to a poor score in terms of price stability,” adding that, over the last twelve months, consumer prices accelerated following the FX adjustments, rising to 33.69 percent in April 2024, from 22.4 percent at the start of the Tinubu administration.

It also pointed out that while these are supply-side shocks with limited recourse to traditional monetary variables, the core CPI data which adjusts for these shocks remains elevated and is suggestive of excessive money supply growth fuelling price increases.

The Agora policy review paper also pointed to interest rates which, it said, relative to President Tinubu’s preference for lower interest rates, the CBN has been unable to meet this objective given the need to bolster the returns to cultivate foreign portfolio investors.

Giving some historical context to the challenges within the economy, the policy note drew attention to the macroeconomic backdrop at the entry of President Tinubu’s administration on May 29 2023, and described it as “one of a structurally degraded growth profile.”

Providing the details, the Agora Policy note stated: “Real GDP growth had decelerated from the 7 percent norm in the pre-2015 period to a 2 percent steady state level. With annual population growth running in the 2.5 percent region, this new normal in economic growth implied lower per capita income growth and a pick-up in Nigeria’s poverty headcount.”

Providing more macroeconomic context, Agora stated that in the lead-up to the crisis, Nigeria earned an average of $80 billion per annum from oil exports during the 2008-2014 period, but noted that this fell to $42 billion in 2015 and averaged $46 billion between 2015 and 2023.

It drew attention to failings by the nation’s economic managers as it noted that “despite the collapse in petrodollar receipts and its adverse implications for fiscal and external account balances, and consequently the ability of policymakers to manage key prices such as the exchange rate, Nigeria’s economic managers refused to make significant adjustments to this new reality.”

The think tank noted that the strong action on the monetary policy front has received praise from local and international observers, but that the country’s key macroeconomic variables have yet to respond favourably for Nigerians. 

“At the heart of this ongoing divergence is the lack of a concerted effort by policymakers to address the forex liquidity problem that underlies the exchange rate turmoil,” Agora pointed out.

According to the policy note, the absence of a tractable source of dollar liquidity to fill the shortfall from oil flows, which remain largely encumbered, continues to hinder CBN’s efforts to manage the foreign exchange situation, adding that without tangible progress on this front, the persistent weakness of the naira will continue to drive higher inflation, necessitating even higher interest rates and leaving a precarious outlook for non-oil sector growth.

On Nigeria’s external sector gap, the policy note observed that the return to orthodox policies has partially addressed this, but added that a complete restoration to historical trend levels will take time. It therefore suggested that Nigeria needs a temporary dollar liquidity bridge to allow reforms to take effect.

“Beyond the rhetoric of orthodox reforms, Nigeria’s economic managers need to directly address the forex illiquidity problem by exploring optimal solutions. These options include a possible Eurobond sale in the $5-10 billion range, though this might be challenging to execute without commercially punitive terms (e.g., double-digit dollar interest rates). Asset sales have been suggested as a way to raise dollar flows, including the sale of certain strategic public corporations. However, outside the oil sector, Nigeria lacks assets of sufficient strategic value to raise large sums quickly,” Agora recommended.

It also recommended the option of sovereign placements, similar to Egypt’s receipt of large foreign dollar deposits from the UAE, alongside support from the EU, UK, and western donors.

It warned that such flows will depend on international diplomacy, for which it said Nigeria lacks a strong history of focused international relations to unlock capital flows.

In the alternative Agora recommended that engaging multilateral agencies like the International Monetary Fund (IMF) for financing options within the context of a reform programme is a viable route.

“Given the difficult reforms undertaken over the last twelve months (hikes in fuel and electricity prices and a shift to a flexible exchange rate system), Nigeria is in a position to negotiate a favourable financing package. While these are fiscal decisions, not within the monetary policy remit, they are crucial for the CBN to stabilise the Naira exchange rate. Success in this area would stabilise exchange rate trends associated with portfolio flows and build confidence to unlock private and foreign USD flows,” Agora said in the policy note.

Other recommendations are that over the medium term, Nigeria must focus on restoring organic dollar flows from oil exports by clearing the backlog of encumbrances, stressing that transparency regarding the nature and size of these liabilities will improve confidence about potential timelines for reserve recovery.

Also, it noted that beyond the immediate forex liquidity problem, there is a pressing need for a credible basis for conducting monetary policy over the medium term, pointing out that while various Nigerian central bank governors have considered inflation targeting, these have largely been declarative positions without the empirical groundwork for setting achievable inflation targets and the policy leeway to attain these goals.

“The crisis of the last twelve months has underscored the importance of the exchange rate in anchoring inflationary expectations. In a small open economy like Nigeria, monetary policy must balance exchange rate stability, crucial for near-term inflation, with non-mineral export competitiveness. This boils down to achieving a Naira Real Effective Exchange Rate (REER) level that anchors inflationary expectations sustainably,” Agora advised.