By Melvin Onwubuke
Fitch Ratings Inc. has highlighted the need for Nigeria to adopt more rigid monetary tightening measures to secure macroeconomic stability.
The credit rating and research firm pointed out that the Nigerian authorities had taken a crucial step towards reducing inflation by significantly adjusting the MRP to 22.75%, which was aimed at fostering more market based exchange rate systems, according to nairametrics.
Despite these efforts, concerns remain regarding the real interest rates, which continue to be negative, and the persistent downward pressure on the exchange rate.
The statement from the agency read, “The recent 400bp increase, to 22.75%, in Nigeria’s monetary policy rate (MPR) marks progress in the country’s efforts to contain inflation and support a more market-determined exchange rate, though real rates remain negative and the exchange rate is still subject to downward pressure, says Fitch Ratings.
“We highlighted low net reserves and weaknesses in the exchange-rate framework as constraints on the sovereign’s credit profile in November 2023, when we affirmed Nigeria’s rating at ‘B-’ with a Stable Outlook.”
In the near term, Fitch expects that the CBN will continue to tighten monetary policy as a result of which inflation is projected to be effectively controlled. The rapid growth of lending and money supply indicates that the monetary environment remains too loose, making it necessary to tighten further in order to move towards stability.
However, there are also challenges in the implementation of these policies. According to Fitch, efficient policy enforcement can be hampered by politics and the complexity of the economy’s environment.
The Agency noted, “Fitch expects the CBN to continue tightening policy in the near term, which seems necessary to more fully control inflation as rapid credit and money-supply growth suggests a still-loose monetary context. Such a tightening will still face implementation challenges, partly due to the potential for countervailing political pressure.
“However, without further sizeable monetary tightening, it may be difficult to achieve macroeconomic stability – real interest rates remain negative, deterring inward portfolio investment.”
Meanwhile, In order to tighten liquidity, the CBN also adopted further measures such as an increase in cash reserve ratios for commercial banks from 32.5% to 45%. The widening of the asymmetric corridor around the MPR is another step to alleviate interest rate pass-through effects.
