"Nigeria\u2019s mixed messages on interest rates are causing a problem"

" Nigeria\u2019s mixed messages on interest rates are causing a problem \r\n\r\nNigeria is sending mixed signals on interest rates even as investors wait to hear from the central bank, which has not held a monetary policy meeting since July.\r\n\r\nThe central bank is offering short-term paper in auctions of its so-called OMOs \u2014 which refers to open market operations and are supposed to be for managing market liquidity \u2014 at far higher yields than government debt with similar tenor.\r\n\r\nThis week it sold 365-day OMOs, which it issues to banks and offshore investors, at 17.5%. It also sold government Treasury bills of the same tenor at 8.39%. The government bills, despite their lower yield, are bought heavily by domestic pension funds who are limited in their investment options.\r\n\r\n\u201cFrom the central bank side, they want rates to go up,\u201d said Sunmbo Olatunji, group head of treasury at Access Bank Plc. Speaking at an investor conference Wednesday in Lagos, she also said that the regulator has removed the cap on interbank borrowing rates which was previously in place.\r\n\r\nNow the interbank rate can go as high as 22-23%, she said, \u201cso the central bank is basically allowing the forces of supply and demand to dictate and determine where rates could be.\u201d\r\n\r\nAt the monetary policy committee in July, the central bank raised the benchmark rate to 18.75%. Since then, inflation has accelerated to a 27-year high of 28.9%. The uptick has in part been fanned by reforms introduced by President Bola Tinubu, who abolished fuel subsidies and eased the country\u2019s exchange-rate regime after taking office in May.\r\n\r\nSurging inflation has raised expectations that the West African nation will hike rates aggressively.\r\n\r\nWhile it has yet to schedule the next meeting of the MPC \u2014 which by law only has to meet four times a year \u2013 the central bank has hinted that rates will have to go up.\r\n\r\nBut some government officials are publicly voicing their doubts.\r\n\r\nRaising interest rates will lead to a \u201csignificant increase in debt service and a growth in the fiscal deficit, without the commensurate pump in savings,\u201d Ben Akabueze, director general of the budget office, told an event in Lagos. \u201cWhile the monetary authority is arguing that way, we on the fiscal side say no, we don\u2019t see that this is the likely impact,\u201d Akabueze said.\r\n\r\nNigeria has a debt servicing problem, which consumed almost all of the government budget last year, and Tinubu promised to lower rates while he campaigned for the presidency.\r\n\r\nFinance Minister Wale Edun, speaking to Bloomberg Television Wednesday in Davos, offered a more nuanced explanation.\r\n\r\n\u201cWe have an autonomous central bank, so the instruments of monetary policy \u2013 interest rates, money supply \u2013 are controlled by them,\u201d he said. \u201cBut of course, it is one government and the objectives of the government, whether fiscal or monetary policy, are set by the government itself.\u201d\r\n\r\nHe said that the need to stabilize the naira and attract foreign investment means \u201cthe direction of interest rates, in the short term, naturally is upwards.\u201d\r\n\r\nHe also said the central bank\u2019s policy committee has typically met every two months \u201cso I\u2019m sure one is imminent. And I\u2019m sure it will be very rich in what it tells investors.\u201d\r\n\r\nStill, monetary policy isn\u2019t very effective in Nigeria, a challenge shared by other nations in the region where the share of the population with access to credit is small, muting the impact of policy changes.\r\n\r\n\u201cNigerian is not a credit economy; there are no mortgages, credit cards that will change your behavior when the interest rate goes up,\u201d said Taiwo Oyedele, chairman of the Presidential Fiscal Policy and Tax Reforms Committee.\r\n\r\nSteadying the naira means boosting foreign investment to ease a local shortage of dollars, which has contributed to its 46% decline against the US currency since exchange rules were eased in June.\r\n\r\nBut that means narrowing the gap between inflation and the central bank\u2019s policy rate, which currently stands at more than 10 percentage points. That makes Nigeria\u2019s real, or inflation-adjusted interest rate, deeply negative, discouraging investment.\r\n\r\n\u201cThere needs to be some level of harmonization between monetary and fiscal,\u201d said Ayodeji Dawodu, \/\/director of fixed income for Central and Eastern Europe, Middle East and Africa\/\/ at BancTrust & Co. Investment. \u201cThe lack of clarity on policy is a concern.\u201d\r\n\r\nInconsistency between the central bank\u2019s OMO auctions, and the much lower yields offered on government debt auction, is compounding that problem, said Razia Khan, chief economist for Africa and the Middle East at Standard Chartered Bank.\r\n\r\nShe said that until there is better signalling of monetary policy intent, which an MPC meeting would help, Nigeria is taking the pain of currency liberalization, with the naira weakening to record levels, without the benefits of attracting capital inflows.\r\n\r\n\u201cMeaningful monetary tightening is a pre-requisite to the ultimate success of FX liberalization, with all of its long-term economic benefit,\u201d she said. \u201cAn MPC meeting would be helpful.\u201d"

"Nigeria\u2019s mixed messages on interest rates are causing a problem"

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