Cardoso has already signalled a departure from his predecessor’s monetary policy approach to the delight of Nigerians and investors alike, pivoting from the unorthodox policies that roiled the economy under Godwin Emefiele.
Nigeria, like most modern economies, strives for price stability and foreign exchange management as part of the cornerstones of its monetary policy. However, the persistently high inflation rates and ongoing economic challenges call for a change in the way monetary policy is administered in Nigeria. In this context, it is crucial to consider several innovative approaches that have been successful in other economies and could be beneficial for Nigeria.
Inflation Targeting: Inflation rose for the ninth straight month in September to its highest level in about two decades at 26.72%, amid a worsening cost-of-living crisis leaving millions reeling from the impact of ongoing reforms. Inflation in Nigeria has remained in the double digits since 2016 despite frequent Monetary Policy Committee actions and decisions. The central bank needs to return to its inflation-targeting approach deployed under former governor Sanusi Lamido which succeeded in taming inflation down to within a 6% to 9% band in 2014. The central bank should adopt the practice of clearly, publicly, and consistently stating its inflation target. This will provide economic agents with a reference point for their inflation expectations.
Forward Guidance: The Bank of England effectively employed forward guidance during the 2008 financial crisis to reassure markets and promote economic stability. On the path toward achieving the target inflation rate, the central bank should provide short to medium-term guidance on its views, planned actions, or decision logic. Ideally, no monetary policy action or announcement should come as a surprise to Nigerian economic stakeholders and market participants.
Microprudential Policy: Given Nigeria’s high inflation rate and the limitations of conventional monetary policy tools, the central bank may need to deploy microprudential directives or policies in specific sectors of the economy instead of raising interest rates, which could negatively impact struggling sectors. The People’s Bank of China, the Asian nation’s central bank, has effectively used microprudential policies to mitigate financial risks in the real estate sector. This approach acts as a precision instrument, but it requires accurate economic data to be effective.
Monetary Policy and Welfare: In addition to employing microprudential interventions to protect citizens’ welfare, the central bank should ensure that its monetary policy considers the human aspect while repositioning the Nigerian economy for rapid growth and industrialization. Collaboration with the fiscal authorities on sustainable measures to address core inflation items, such as food, energy, transport, and telecoms/internet, is essential.
Policy Trilemma: The central bank should recognize that its monetary policy is intertwined with its foreign exchange and remittance policy. Foreign exchange and remittance policies should be viewed as integral components of a broader toolkit for economic repositioning, and they must be executed and communicated in a way that aligns with overall monetary objectives. The recent move by the central bank to clear a backlog of matured forward foreign-exchange contracts, estimated at $7 billion, has seen the naira currency soar 10% to 1,035 on November 3 after slumping to a record low of 1,300 to the dollar in late October.
The Central Bank of Nigeria, under the leadership of Cardoso, has a crucial role to play in restoring competence, integrity and confidence to its monetary policy. It must clearly communicate its objectives, demonstrate commitment to said objectives, and provide economic agents with a transparent framework for decision-making. By thoroughly understanding the intricacies of the Nigerian economy and its shock transmission mechanisms, the central bank can better tailor its monetary policy tools to achieve desirable results.
In conclusion, Nigeria’s monetary policy is at a crossroads, and change is imperative. By embracing innovative approaches, the central bank can chart a path toward greater stability and prosperity for the nation.
Dr. Olusiji Sanya, economist and Chief Financial Officer at Tranzfar Group UK
