Photograph — Club of Mozambique

Global credit rating agency, Fitch, has questioned the recent directive by President Muhammadu Buhari to end foreign exchange for milk importers and food imports in Nigeria. The firm also raised an alarm over what it regards as ‘unconventional policies’ which the Central Bank of Nigeria (CBN) has been adopting recently.

The CBN recently moved to intensify restrictions on forex access for imports that were imposed in 2015, adding milk and dairy products to the list of 42 product categories subject to restrictions on access to forex. In its latest report titled Nigeria’s Unconventional Policies Aggravate External Vulnerability, Fitch Ratings said the scope, modalities, and timeline of such measures remain unclear.

More so, the restrictions are unlikely to foster expansion in the domestic food supply; instead, they could push more traders towards the informal economy and compound inflationary pressures, the report said. This is because Nigeria’s agricultural and food sectors suffer from “deep-seated challenges” such as infrastructure gaps, communal conflicts, insecurity, and weather hazards.

Mismatch in economic policy

According to Fitch, the CBN under the current administration might drag the Nigerian economy in crisis due to mismatch in economic policy management. The agency explained that the apex bank’s recent attempts to improve economic activity by incentivizing bank lending counter the goal of maintaining a stable exchange rate, a trend that is bad for the economy.

“Attempts to reconcile competing goals through unconventional macroeconomic management and weaknesses in policy settings are raising medium-term vulnerabilities to shocks,” the report said, adding that this could make the economy more exposed to falling oil prices or disruptions to hydrocarbon production.

One of the major policies cited by Fitch Ratings as an example is the CBN directive issued in July which requires deposit banks to have a loans-to-deposits ratio (LDR) of at least 60 percent at end-September and tighter restrictions on the number of remunerable deposits that banks can keep at the central bank.

The rating agency noted that tight management of domestic liquidity had been the key pillar of Nigeria’s exchange-rate policy in recent years. But several recent measures to boost lending have contributed to a temporary loosening of domestic financing conditions. This, combined with falling oil prices and deteriorating investor sentiment towards emerging markets, puts pressure on the naira.

Exchange-rate pressure then led the CBN to resume its liquidity tightening operations in August by auctioning Open Market Operations (OMO) bills, and to increase the supply of foreign currency, releasing about $800 million from its foreign-currency reserves between mid-July and mid-August.

According to Fitch, these moves by the CBN have contributed to a rebound in domestic interest rates and limited the depreciation of the naira on the Investors’ and Exporters’ forex window by one percent since the end of June.

The agency expects the CBN to continue to pursue a combination of tight liquidity management, segmented exchange-rate markets, and forex interventions and restrictions. According to the agency, this will be aided by ample international reserves of more than six months of expected 2019 current account payments, and a small current account surplus estimated on Brent prices averaging at least $60 a barrel.

However, the CBN’s policy of auctioning OMO bills to non-residents has led to a rapid build-up of short-term external liabilities with non-resident holdings of these bills amounting to $5.8 billion (4 percent of GDP and equivalent to a third of reserves) at the end of April. This generates meaningful rollover risks, which could necessitate persistently high-interest rates, holding back growth and increasing the government’s debt-servicing costs.

Thus, the competing goals of preserving naira stability and supporting Nigeria’s fragile recovery are “pushing the CBN towards increasingly complex policy measures, with a risk of aggravating external vulnerability or causing macroeconomic distortions,” Fitch said in the report.

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