The Central Bank of Nigeria (CBN) finally held its first Monetary Policy Committee (MPC) meeting since its new governor resumed office. There was a lot of uncertainty in the atmosphere before this meeting because it took over five months to hold an event that usually happens monthly. And more importantly, the country’s dire economic situation needs urgent attention. Nigeria’s inflation is at a three-decade high of 30%, and the naira has lost nearly 70% of its value to the dollar since Bola Tinubu became president last May.
Now that we’re past the waiting phase, Yemi Cardoso, the CBN governor, has announced a mixed bag of policy changes. Some of his statements gave comfort, while others were worrisome. However, what stands clear is that he is not taking subtle approaches. According to Cardoso, Nigeria needs “a very aggressive regulatory environment”. Here are our key takeaways from the meeting.
Higher interest rates
The apex bank is tackling inflation by increasing its benchmark interest rate by 400 basis points to 22.75%. Nigeria’s last rate review was an increase of 25 basis points (0.25%) last July when inflation was 22.79%. That happened under an interim head of the central bank after Tinubu fired Godwin Emefiele, the former governor of the bank who now faces fraud and felony charges brought by the government.
The committee decided to act based on “the current inflationary and exchange rate pressures, projected inflation and rising inflation expectations,” Cardoso said. “Members were concerned about the persistent rise in the level of inflation and emphasised the committee’s commitment to reverse the trend as the balance of risks lead to rising inflation.”
The MPC has now lifted the benchmark by an unprecedented 1,025 basis points since its tightening campaign began in May 2022.
Much ado about crypto
The CBN’s feud with crypto exchanges is not over. Cardoso claimed that last year, $26 billion worth of untraceable funds flowed through Binance Nigeria. “We are concerned that certain practices go on that indicate illicit flows going through a number of these entities and suspicious flows at best. In the case of Binance, in the last year alone, $26 billion has passed through Binance Nigeria from sources and users who we cannot adequately identify,” Cardoso said. He didn’t provide any sources for this data.
Cardoso mentioned this point to explain the intent behind the regulatory restrictions on crypto exchanges like Binance and Coinbase. The apex bank is scraping for means to stop the naira’s free fall, which started when the country floated the exchange rates in July.
Banks should brace for impact.
Banks might be collateral damage for the CBN’s attempts to save the economy. Cardoso said the MPC “acknowledged the tradeoff between the pursuit of output growth and taming inflation but was convinced that an enduring output expansion is possible only in an environment of low and stable inflation.”
What will impact them the most? Aside from hiking borrowing costs, the MPC also tightened other liquidity measures by increasing the cash reserve ratio to 45% from 32.5% and adjusting the bands around which banks can fund and lend money. Henceforth, the cost at which lenders borrow will be 100 basis points above the monetary policy rate (MPR), and the return on their deposits will be 700 basis points below that benchmark, from 300 basis points previously.
As an aside, it’s refreshing to know that the days of MPC no-shows might be behind us. The next meeting should happen on March 25th and 26th, 2024
