Actions of the Central Bank of Nigeria (CBN) since its Monetary Policy Committee (MPC) meeting held on Tuesday, September 24th, 2024, have shocked the markets in ways not evidenced in a very long time. The CBN hiked the Monetary Policy Rate (MPR) by 50 basis points (from 26.75% to 27.25%), to the astonishment of market participants as speculations were to the extent that the CBN would either maintain the rate as it was or cut it by about 25 basis points. The MPC also increased the Cash Reserve Ratio, (CRR), a policy shift which in the views of many has been described as excessive. Although inflation has somewhat stabilised in the last two months, in the words of the CBN Governor, this current hike was made in a bid to further moderate inflationary pressures.
Beyond the MPR and CRR hikes, the CBN conducted two OMO auctions in the week under review, allotting 1-year bills above 32% effective yield. The sudden aggression deployed to deduct from liquidity in the banking system at any cost has been construed by many (local as well as offshore) stakeholders as extremely scary. As Nigeria tackles inflationary pressure and currency devaluation, it is clear to many analysts that monetary policy has done the most it can, and the needed solution from this point is more structural.
At the NAFEM Window, the exchange rate traded as high as $/N1,699.00 on Wednesday and Thursday, and as low as N1,530.00 on Friday. The market closed the week at $/N1540.78 and interbank Naira liquidity was long throughout the week as CBN sought to debit all the excess liquidity.
With the recent trend of a decline in rates during auctions, the Bonds auction in September was no exception. The offer was for a total of N150 billion. However, we observed the DMO allotted over N260 billion – which is over 170% of the amount on offer. The 5-year tenor saw a decline of 130 basis points, the 7-year tenor saw a decline of 91 basis points, and the 9-year tenor saw a decline of 145 basis points, closing at 19%, 19.99%, and 20.05%, respectively.
The decline in rates across the various tenors illustrates the DMO’s focus on borrowing at the lowest possible rate. Also, this shows the institution’s confidence in raising the requisite government funding through the issuance of dollar assets.
BONDS TENOR | APRIL 2029 | FEBRUARY 2031 | MAY 2033 |
AUCTION DATE | 23-09-2024 | 23-09-2024 | 23-09-2024 |
SETTLEMENT DATE | 25-09-2024 | 25-09-2024 | 25-09-2024 |
MATURITY DATE | 17-04-2029 | 21-02-2031 | 15-05-2033 |
TENORS | 5-YEAR | 7-YEAR | 10-YEAR |
AMOUNT OFFERED (₦) | 70 BILLION | 50 BILLION | 30 BILLION |
SUBSCRIPTION (₦) | 22.555 BILLION | 54.979 BILLION | 337.347 BILLION |
AMOUNT ALLOTTED (₦) | 2.732 BILLION | 31.079 BILLION | 230.716 BILLION |
STOP RATES (%) | 19.0000 | 19.9900 | 20.0500 |
PREVIOUS STOP RATES (%) | 20.3000 | 20.9000 | 21.5000 |
In contrast to the FGN Bonds auction where we observed a decline in stop rates, the NTBs auction closed 37 basis points higher for the 91-day tenor, a 50 basis points hike for the 182-day tenor, and a 141 basis points hike for the 364-day tenor. The contrasting outcomes between the FGN Bonds auction and the NTBs auction illustrate a nuanced market landscape. While the bonds auction experienced a decline in stop rates, indicating strong demand and a willingness among investors to accept lower yields for longer maturities, the NTBs auction reflected a different sentiment.
Higher rates for the NTBs suggest an increasing perception of risk in the short-term market, perhaps attributable to concerns about liquidity or monetary policy tightening, thereby prompting investors to demand higher yields as compensation for perceived risks. Further, analysts believe that this shift in perspective could be a result of the MPC decision, most especially the increase in CRR.
AUCTION DATE | 25-09-2024 | 25-09-2024 | 25-09-2024 |
ALLOTMENT DATE | 26-09-2024 | 26-09-2024 | 26-09-2024 |
MATURITY DATE | 26-12-2024 | 27-03-2025 | 25-09-2025 |
TENOR | 91-DAY | 182-DAY | 364-DAY |
OFFER (₦) | 28,153,233,000 | 25,576,536,000 | 173,814,852,000 |
SUBSCRIPTION (₦) | 30,653,637,000 | 23,194,104,000 | 250,420,037,000 |
ALLOTMENT (₦) | 27,347,032,000 | 23,094,104,000 | 177,103,485,000 |
STOP RATES (%) | 17.0000 | 17.5000 | 20.0000 |
PREVIOUS STOP RATES (%) | 16.6300 | 17.0000 | 18.5900 |
On Wednesday, liquidity in the system hit its highest for the week (over N800 billion surplus). In a bid to mop up cash from the system, the CBN conducted an OMO auction on Thursday, September 27, 2024. Of the N500 billion on offer, only over N253 billion was sold of the 362-day tenor. When compared to the last auction, there was a hike of 256 basis points, closing at 24.3600% – the highest stop rate reported in over a decade.
One could infer that the occurrence at Thursday’s OMO auction reflected a strategic move to tighten monetary conditions and manage liquidity in the financial system, although some analysts are of the opinion that the CBN’s actions were targeted to attract offshore investors. However, the outcome of the auction may signal a cautious approach among investors who seek to balance the need to yield against the backdrop of uncertain economic conditions
TENOR | AUCTION DATE | OFFER (₦’B) | BIDS (₦’B) | RANGE OF BIDS (%) | STOP RATES (%) | PREVIOUS STOP RATES (%) | TOTAL SALE (₦’B) |
96-DAY | 26-09-2024 | 75.00 | NIL | NIL | NIL | NIL | NIL |
194-DAY | 26-09-2024 | 75.00 | NIL | NIL | NIL | NIL | NIL |
362-DAY | 26-09-2024 | 350.00 | 252.90 | 22.8900-24.3600 | 24.3600 | 21.8000 | 252.90 |
On Friday, another OMO auction was held with little or no activity. Of a total offer of N500 billion, only N2 billion was sold of the 361-day tenor at 24.3000%.
TENOR | AUCTION DATE | OFFER (₦’B) | BIDS (₦’B) | RANGE OF BIDS (%) | STOP RATES (%) | PREVIOUS STOP RATES (%) | TOTAL SALE (₦’B) |
95-DAY | 27-09-2024 | 25.00 | NIL | NIL | NIL | NIL | NIL |
193-DAY | 27-09-2024 | 25.00 | NIL | NIL | NIL | NIL | NIL |
361-DAY | 27-09-2024 | 450.00 | 245.00 | 24.3000-26.4000 | 24.3000 | 24.3600 | 2.00 |
The CBN’s unexpected decision to raise the Monetary Policy Rate (MPR) by 50 basis points to 27.25% has significant implications for both banks and the broader economy. This increase marks a cumulative rise of 850 basis points in Governor Yemi Cardoso’s tenor, and emphasises the CBN’s commitment to combating inflation, amidst signs of moderation. For banks, the elevated MPR means higher borrowing costs. As the cost of funds increases, banks are likely to pass these costs on to consumers and businesses through higher interest rates on loans. This could lead to reduced lending activity and increased non-performing loans.
From an economic perspective, while the intent behind this hike is to rein in inflationary pressures, the short-term effects could be a slowdown in economic activity. Higher interest rates generally discourage consumer spending and business investment, which are crucial drivers of growth. With borrowing becoming more expensive, sectors reliant on credit, such as real estate and small businesses, may struggle to maintain momentum. The challenge for the CBN will be how to balance these conflicting dynamics, that is, controlling inflation without stifling growth.
In the same vein, the CBN significantly increased the Cash Reserve Ratio (CRR) for Deposit Money Banks by 500 basis points (from 45% to 50%), and that of Merchant Banks by 200 basis points (from 14% to 16%). This decision by the CBN to raise the CRR signifies a strong stance on monetary policy aimed at curbing inflation and controlling liquidity in the financial system. Specifically, by increasing the CRR, banks are required to hold a larger portion of their deposits as reserves which in turn, reduces the amount of money available for lending.
For banks, this increase in the CRR could impact profitability as they will have less money to lend and earn interest on. With higher reserves, banks may face pressure to adjust their lending rates, potentially passing on costs to borrowers. This could further dampen consumer spending and business investment, which are crucial for economic growth.
While this measure may help stabilise the economy by addressing inflationary pressures, it could also lead to reduced liquidity and slower economic growth in the near term. Where lending slows significantly, it could hinder job creation and business expansion, contributing to a more challenging economic environment. Therefore, the balance between controlling inflation and promoting economic growth will be critical for the CBN’s ongoing monetary policy strategy.
Worthy of note is the fact that the CBN acknowledged the relationship between FAAC disbursements and liquidity levels, thereby highlighting the importance of fiscal policy in the broader economic context. However, the CBN’s focus on controlling inflation and stabilising the currency means that any liquidity from FAAC needs to be carefully managed to avoid exacerbating inflationary pressures. While these monetary policy measures are aimed at stabilising the economy amidst food inflation, energy price hikes, and flooding, they also require a delicate balance to ensure that growth is not unduly suppressed in the process.
The decision by the apex bank to increase interest rates reflects a broader global trend aimed at combating inflation. This move warrants a deeper examination of its long-term implications within the Nigerian context.
While higher interest rates can indeed restrain spending and borrowing, there is an underlying risk that continued hikes may indirectly prevent economic growth. The Nigerian economy which is currently contending with structural challenges such as currency fluctuations and supply chain disruptions, could face significant headwinds where businesses and consumers find financing increasingly unaffordable. This could lead to a contraction in investment and consumption, which, paradoxically, could entrench inflationary pressures rather than alleviate them.
Furthermore, the ripple effects of sustained interest rate increases can disproportionately affect vulnerable segments of the population. As borrowing costs rise, Small and Medium-sized Enterprises (SMEs) may struggle to sustain operations, potentially leading to job losses and lower household incomes. This could create a feedback loop, wherein reduced spending power fuels cost-push inflation in essential goods, ultimately undermining the CBN’s objectives.
The situation is compounded by Nigeria’s reliance on imported goods, where the interaction between interest rates and exchange rates becomes particularly critical. Higher rates might attract foreign investment in the short term, but where the Naira weakens due to economic uncertainty, the cost of imports could escalate, prolonging inflation despite the CBN’s tightening measures.
When viewed from the lens of Foreign Exchange, inflation, and the controversial issue of subsidy removal, the current state of the Nigerian economy presents a complex view, which demands careful analysis. As the Naira approaches the unsettling threshold of $/N1,700, the ramifications on inflation and broader economic stability become increasingly pronounced. A depreciating currency naturally elevates the cost of imported goods, worsening inflationary pressure on an economy that appears dependent on its imports.
The removal of fuel subsidies last year has only compounded these challenges. While advocates argue that the move encourages a more sustainable fiscal environment and promotes investment in alternative energy sources, critics highlight the immediate hardship it inflicts on citizens. The resultant effect on fuel prices has led to a rise in transportation costs and, by extension, the prices of essential goods and services.
Strategic coordination among government agencies is crucial in this delicate environment. A lack of synchronisation could lead to erratic policy implementations, further destabilising the economy. For instance, where the CBN raises interest rates to combat inflation without addressing the underlying causes—such as foreign exchange volatility and the repercussions of subsidy removal—the intended effects would be undermined. Inconsistencies in policy responses may fuel public scepticism and erode confidence in policies.
Furthermore, the discourse surrounding subsidy removal is far from straightforward. It evokes a spectrum of opinions, with some arguing for the need to reallocate resources towards critical infrastructure and social services, while others warn of the potential socio-economic fallout from rising living costs. Engaging in this dialogue requires sensitivity and transparency, as the implications affect millions of Nigerians.
One of the most effective ways to combat inflation will be to enhance our domestic production capabilities, which will reduce our reliance on imports and mitigate the adverse effects of foreign exchange fluctuations. By investing in local industries, the government can stimulate job creation, encourage innovation, and ultimately enhance the country’s self-sufficiency. Promoting local production not only contributes to economic stability but also helps insulate consumers from the price volatility associated with imported goods.
Local production should be supported by the implementation of policies that motivate Small and Medium-sized Enterprises (SMEs). Providing access to affordable financing, facilitating training and development, and streamlining regulatory requirements to empower such businesses to thrive. Additionally, creating a robust framework for public-private partnerships can encourage collaboration between the government and the private sector, driving investment in key industries such as agriculture, manufacturing, and technology.
Moreover, consumer behaviour plays a crucial role in addressing inflation. A nationwide campaign to encourage the purchase of locally produced goods can help shift consumer preferences, thereby strengthening domestic businesses and creating a viable cycle of economic growth.
Furthermore, enhancing infrastructure—such as electricity and logistics—is vital to supporting local production. By improving these critical components, the government can reduce the operational costs of doing business, thereby promoting competitive pricing which is less susceptible to inflation. Additionally, investing in technology and innovation can enhance productivity, further lowering costs and improving the quality of goods produced locally.
The Nigerian government appears to have encountered several critical missteps that have hampered economic stability and growth, particularly in the context of rising inflation and exchange rate volatility. One glaring oversight is the provision of tax waivers on certain imported food items. While intended to alleviate the burden on consumers and ensure food security, these waivers have inadvertently undermined local agricultural production. By making imported goods cheaper, the government has created an uneven playing field where local farmers struggle to compete, leading to food inflation and reducing the overall capacity of the agricultural sector.
In the views of some economists, the decision to liberalize the exchange rate and allow it to float has introduced significant volatility in the foreign exchange market. While a more flexible exchange rate could theoretically lead to better market adjustments, the reality has been far from ideal. The Naira’s depreciation against major currencies has resulted in escalating costs for businesses reliant on imported raw materials and goods, leading to increased prices for consumers. This situation not only drives inflation but also creates an atmosphere of uncertainty that deters investment.
Ultimately, the government must reassess its approach to fiscal policies, particularly in relation to taxation and exchange rate management. By prioritising local production and re-evaluating the consequences of its decisions, the Nigerian government can build a more stable economic environment that supports sustainable growth and mitigates the effects of inflation.
As we approach the last quarter of 2024, Nigeria stands at a critical juncture in its economic development. Characterised by a high unemployment rate and persistent inflationary pressures, the nation’s economic outlook presents both significant challenges and promising opportunities. Key issues, including foreign exchange volatility, rising inflation, and the complexities surrounding subsidy removal, dominate discussions among policymakers and citizens alike.
A lot depends on CBN’s approach going forward. With no planned auction this week, regulators, traders, analysts, and investors have a chance to catch their breath as they analyse the decisions of the past week. Following the sale of FX to Bureau De Change (BDCs) last week, we expect pressure to ease on the Naira while the fixed income markets are likely to remain choppy, as traders trade subject to liquidity. We expect China’s stimulus plan and Middle East tensions heightened by Israel to influence cryptocurrency and oil prices this week.
