The Central Bank of Nigeria’s policy approach to raising the monetary policy rate sharply in May 2022 will continue to impede efforts to slow down inflation, according to Fitch Ratings.

Analysing the policy, Fitch noted that the country’s complex policy approach will be maintained at least until the next presidential election in February 2023. This shows that a significant strengthening of macroeconomic performance appears unlikely in the near term, despite the supportive effects of higher global oil prices for the economy.

“The Russia-Ukraine war’s impact on global prices, notably for food and energy, has seen inflation accelerate in 2022. Consumer prices rose 17.7% year-on-year in May 2022, up from last year’s low of 15.4% in November 2021. [We] now forecast Nigeria’s inflation to average 17% in 2022, unchanged from the 2021 average. In March 2022, we had predicted inflation this year would average 14.6%.”
Fitch Ratings

The authorities had planned to phase out fuel subsidies in 2022, but they are now unlikely to be removed before 2023. This helps to contain 2022 inflation, but the cost of the subsidy- borne by the Nigerian National Petroleum Corporation (NNPC)- has reduced NNPC transfers to government. As a result, Fitch forecast the general government deficit to narrow only moderately to 3.4% of GDP this year, from 4.2% in 2021.

According to the Ratings Agency, atleast one interest-rate hike in 2022 was expected, but the 150 basis point (bp) increase in the main policy rate, to 13%, on May 24, 2022, was larger than anticipated.

Further Hikes in Interest Rate Possible

Further increases are possible, as officials with the Central Bank of Nigeria (CBN) have indicated a preference for real interest rates to be less steeply negative, Fitch noted. Moreover, Fitch forecasts that the CBN will use the Cash Reserve Ratio and the issuance of CBN special bills to tighten liquidity.

The CBN is using these discretionary measures to inject or withdraw liquidity from the financial system, as well as influencing borrowing costs for specific sectors through various loan guarantees and direct support facilities. This has made monetary policy difficult to gauge and created a segmented interest-rate environment, impeding the transmission of monetary policy.

The CBN adopted the Investor and Exporter (IEFX) window as the official exchange rate in May 2021. However, it continues to use administrative controls to manage the demand for foreign exchange, which has caused economically damaging shortages.

Persistently high inflation is a key macroeconomic weakness, contributing to Nigeria’s relatively modest growth rates and weighing on external liquidity by discouraging financial account inflows.

Fitch forecasts Nigeria’s growth at 3.1% in 2022. High oil prices will lift oil receipts, which together with a post-pandemic recovery in activity should support non-oil sector growth. Still, high inflation this year will dampen growth by eroding consumer and business purchasing power.

The oil sector’s inability to raise production will provide a further obstacle to higher growth. Oil production slipped to 1.26 million barrels per day (bpd) in May 2022, from an average of 1.38 million bpd in Q1 2022.