The Central Bank will have a new governor in 2014.
The dynamics of Nigeria’s monetary policy in 2014 would be determined by the new Central Bank of Nigeria (CBN) governor expected to take over when the incumbent, Sanusi Lamido leaves later this year, as well as the new Monetary Policy Members who would also be absorbed.
Nigeria’s President, Goodluck Jonathan, has the authority to appoint the next Central Bank Governor and three out of the five new members of the MPC.
Bismarck Rewane, a finance expert and Managing Director, Financial Derivatives Company, a diversified financial institution, said the independence of the new appointees would determine the path the monetary policy would thread.
“If the Central Bank Governor and the three members appointed by the President have some affiliations with the government, then it is likely that monetary policy may be less restrictive to provide more room for government spending. However, if the new appointees are truly independent, then policy may depend on whether their preference for growth comes before price and exchange rate stability.
“Whatever the case may be, it is more likely that a balance will be found so as to accommodate the pressing concerns of Quantitative Easing (QE) tapering (an unconventional monetary policy used by Central Banks to stimulate the economy when standard monetary policy has become ineffective), a possible downturn in oil prices, and increased fiscal spending,” he said.
“With the election year close at hand, we believe monetary and fiscal policy will be more difficult to manage in 2014. However, the possibility of a downturn in oil prices and the commencement of the US tapering, begs for a tight fiscal and monetary policy stance; fiscal spending is bound to increase astronomically in preparation for the elections. The change in central bank governor and some MPC members is also expected to change the dynamics of monetary policy,” he added.
Nigerian economy ended with a tight monetary policy stance and somewhat manageable fiscal spending in 2013. These policies aided a benign inflation rate, relatively stable exchange rate, and moderate GDP growth rate.
Right from the beginning of the year, 2013 was earmarked as a year of fiscal prudency. The 2013 budget proposed a decline in fiscal deficit to 1.85% (from 2.85% in 2012), a reduction in domestic borrowing to N577bn (from N744bn in 2012) and a decline in recurrent expenditure to N2.38trn (from N2.43trn in 2012). The somewhat moderate fiscal spending helped external reserves to remain at a sustainable level despite the decline in oil production during the year.
The Monetary Policy Committee (MPC) also adopted a contractionary stance by keeping the benchmark interest rate at 12 per cent, where it remained throughout the year. This led to an increase in capital flows into Nigeria from other advanced economies with lower interest rates. It also facilitated a benign inflation environment as well as a stable exchange rate at the official and interbank markets. However, individuals did not experience the real impact of growth due to high borrowing costs, which prevented them from augmenting their spending.
Despite the pre-meditated measures adopted by policy makers, Mr. Rewane said it can be argued that some other conditions facilitated the moderation in spending. For example, there were no heavy rains experienced during the year that could have led to increased spending to salvage any destruction caused by flooding. Also, the security issues in the Northern region were eventually curtailed to only three states. In addition, Nigeria was insulated to a large extent from the economic crisis that rocked the advanced economies.
In 2014, there are concerns about the associated increase in spending that usually occurs when government elections are at hand. Reports reveal after the 2011 elections, the Independent National Electoral Commission (INEC) reported that Nigeria spent N122.9bn to conduct the elections and this amount reportedly did not take into account the monies spent unofficially by politicians to fund their campaigns.
Furthermore, violence associated with elections is likely to spring up in several states, which will require increased spending on security intervention. Increased government spending has a downside effect on inflation and the exchange rate. Nevertheless, fiscal prudency is almost implausible in 2014.
According to Mr. Rewane, as a result of these considerations, monetary policy is anticipated to remain contractionary, with a high likelihood of further tightening, to maintain price and currency stability, “even though this implies that individual real growth will continue to suffer due to high borrowing costs. However, this depends on the leanings of the new Central Bank Governor and 5 new members of the MPC”.
“In sum, monetary and fiscal policy decisions in 2013 went according to plan as policy makers were able to manage disruptions. However, the policy decision in 2014 will likely be more difficult to manage considering the preparations for government elections, the possibility of a downturn in oil prices, QE tapering in the US, as well as a change in MPC membership,” he said.