Nigeria’s Central Bank: Unchanged Interest rate, removal of oil subsidies and inflation

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Financial Analysis and Economic Perspective By Afripol Organization.

The executive governor of the Nigeria‘s apex bank, Sanusi Lamido Sanusi eased the jittery and anxiety among capital market traders and financial marketers by not altering the benchmark interest rate. The Central Bank of Nigeria (CBN) chieftain allowed the 6% benchmark interest rate to stay put but he further slashed the borrowing rate from 2% of the fourth quarter of last year to 1% in this tail end of first quarter of 2010.

“It is essential to maintain a moderately low interest to bring about the long needed liquidity into the capital market. The credit crunch will not be allowed to take the upper hands and in turn frustrate economic growth and wealth creation. The marketers and market need the flow of credit and with lower interest the banks will not hesitate to lend out money to traders and business community,” Afripol commented in 2009.

The point one can deduced is that CBN has not given up on its pro-growth and pro-market policies. But in spite of the CBN policies and good intentions, the greatest danger lies ahead because of the policy pursued by the executive arm of the government. This policy of the removal of fuel subsidies by the Federal government of Nigeria makes sound economic meaning, but downside is that it might surge higher inflation and citizens’ suffering. The plausible economic merit is that it is healthy for business and financial growth of the market. There is no doubt that Nigeria can claimed that it has wasted a lot of resources on the subsidies. It was estimated that in the last fiscal year more than $3.9 Billion dollars was sunk on the fuel consumption subsidies.

Removal of the petroleum subsidies might be good for the economic development of a true market economy. Nigeria can benefit by making sure that it does not run a deficit that retard economic development and accelerate recession in the country. Making the decision for the removal must be difficult because the populace are already addicted on the artificial price of fuel. The public might not accept changing the status quo because from their perspective the only bright spot they see in their country’s large oil reserve and wealth are the subsidies. The large chunk of the growing population is not getting anything from the country’s oil wealth.

Nigerian government must have to consider how the removal of fuel subsidies will affect the impoverished people of the country. Most Nigerians about 70% live in poverty surviving with less than $1 dollar a day. Therefore removing subsidies will make transportation more expensive. The people have not received any dividend from democracy or from the oil wealth. There is no electricity, no drinking water compounded with difficult life of depravity.

International Monetary Fund (IMF), Standard & Poors, Moody’s Investors Service and international financial institutions see these subsidies as antithetical to free market sensibilities with a long run depressing impact on the market; with the possibility of lowering country’s credit ratings. Moreover these subsidies are not sustainable with the country undiversified economy with a limited foreign exchange and a growing population.

Central Bank of Nigeria (CBN) must be cautious on dealing with the government’s removal of the fuel subsidies due to subsequent rising inflation. It was looking good last year when it appeared that inflation was coming down. Even Sanusi Lamido’s CBN was predicting lower inflationary trends for 2010.  And Sanusi’s CBN anticipated that inflation rate will dip below 9 percent by the end of 2009. This can be possible with the end of the credit shortage and the banking crisis. Rather rising inflation may be a threat to the economy, which stood at 12.3% this January and which may go higher with the removal of the subsidies.

The CBN has been active for a while, it funneled almost $4 billion dollars to bail out five major Nigerian banks and to ease credit crunch in the market in 2009. And it lowered the benchmark interest rate from crushing 8% to 6% in same year. The CBN operators do not function in vacuum for without credible fiscal policy from the executive arm of the government, the CBN even with clear oriented policy may still flounder.

For Nigeria to deflate the possible rising inflation from removal of fuel subsidies, Afripol holds the perspective that CBN must go further to cut down the benchmark interest rate to 4% and even 3.5% momentarily. To keep the market soluble with enough liquidity can be the greatest resistant to the continue recession without triggering further inflation when subsidies are finally removed.

Africa Political and Economic Strategic Center (Afripol) is foremost a public policy center whose fundamental objective is to broaden the parameters of public policy debates in Africa. To advocate, promote and encourage free enterprise, democracy, sustainable green environment, human rights, conflict resolutions, transparency and probity in Africa.       info@afripol.org