Nigeria: Forex reserve depletion could push Central Bank to increase interest rates
The Central Bank of Nigeria may need to tighten monetary conditions, in form of higher rates, in line with the global trend of managing foreign currency reserve depletion.
This is according to a Sigma Pensions report titled, ‘Nigeria 2022 outlook: Consolidating on recovery but persisting large imbalances present headwinds’.
The report states that emerging pressures on the fiscal and FX fronts should naturally drive renewed urgency towards reducing large subsidies and FX rate misalignments, as the onset of the 2023 electioneering season is likely to lead to continued policy inertia.
What the report is saying
The report stated that the FX challenges would lead to the CBN implications of Ming contractionary monetary policy. The apex bank can deploy contractional monetary policy such as higher interest and sell off bonds to mop up the money in circulation in order to curtail inflation.
The report said, “Furthermore, likely stronger dollar demand will convince the CBN of the need to tighten monetary conditions as with the trend across global central banks to manage FX reserve depletion. Against this backdrop, we think the current bearish trends in the fixed income market will likely persist over 2022.
“For equity markets, we see bearish trends dominating market sentiments as the fixed income optionality becomes available to investors after a two-year hiatus and as political risk premiums on Naira risk assets heighten ahead of the 2023 general elections.”
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Domestic institutional investor support in bellwether names is expected to continue to limit overall market loss, according to the business.
“Despite the emergence of new variants of the COVID-19 virus, we view higher vaccine coverage and the existence of drugs as supportive of further normalisation in global economic activity in 2022. Rising inflation expectations from a mix of supply bottlenecks and stimulus fueled demand is likely to drive a withdrawal of global monetary stimulus and incite interest rate hikes which will underpin higher US dollar interest rates,” the report said.
According to the analysis, substantial fiscal borrowing requirements in 2022, along with less liquid financial system conditions, offer ample room for heightened market expectations of higher interest rates, compared to the previous two years.
It said, “We expect the oil sector to exit recession in 2022 as Nigeria’s crude production rebounds from the 1.6mbpd low base in 2021 towards a range of 1.8-1.85mbpd and as most OPEC+ curbs are removed by May 2022.
“We expect Nigeria’s economic growth to stabilise around 3.4 per cent in 2022, reflecting improvements across telecoms, trade, manufacturing, and oil.”
According to the report, a large fiscal borrowing plan and higher political risk premiums are expected ahead of the 2023 general elections.
