Omodele Adigun

Despite the various measures put in place by the monetary authority to reboot the economy at one end, though with unintended  negative consequences, a financial expert has warned that tight fiscal policies at the other end may do more damage to the economy.

According to Mr Lukman Otunuga, a Senior Research Analyst with FXTM, who gave the warning at an online media roundtable Thursday, tight fiscal policy may do more harm than good as monetary authority’s tools to tame inflation is now limited.

His words: “With consumer prices projected to jump to almost 14 per cent in October, this will be the highest rate since February 2018. In a perfect world, the government may have deployed tight fiscal policy to tame inflationary pressures. However, such a move that involves raising taxes and limiting government spending may do more damage than good at a time where Nigeria continues to heal wounds inflicted by COVID-19.

With inflation projected to rise amid ongoing border closures, the Central Bank of Nigeria (CBN) may have limited room to loosen monetary policy. The unsavoury combination of border closures, coronavirus related disruptions and lower interest rates have fuelled inflationary pressure.”

Otunuga explained that, though Nigeria’s economic fundamentals remain mixed  with foreign exchange reserves down to $35.66 billion in August; Manufacturing PMI rose 49.4 in October; unemployment hit 27.1 per cent in second quarter (Q2); trade deficit of $807.2 billion was recorded in June, while inflation spiked above CBN’s target since 2015.

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He stated: “Inflation remains above the CBN 6 per cent to 9 per cent target. Latest is 13.71 per cent. CBN has cut interest rates twice in 2020 with MPR at 11.5 per cent; loan-to-deposit (LDR) ratio at 65 per cent. All these show that there are limited tools to tame inflation.”

Looking into the future, Otunuga projected that CBN might review the LDR with a view to encouraging lending to the real sector.

His words: “In the absence of repeatedly cutting interest rates to stimulate economic growth, CBN turned to unconventional monetary policy tools. The CBN may revisit the LDR policy. Raising the LDR was a strategy seen  to encourage banks to lend and de-risk the real sector, particularly SMEs.

Back in October 2019 when the LDR was raised from 60 per cent to 65 per cent, questions were raised whether such a move would support economic growth at a time where the country was dealing with severely depressed oil prices and rising inflationary pressures

“Although consumer credit improved during the first few months of 2020, from N1.4 trillion in January to N1.6 trillion in May.  However,  the coronavirus outbreak and strict lockdown restrictions heavily impacted cash flow and income of individuals and businesses. This raised the risk of bad loans, ultimately reducing lending by banks to consumers.

“While the LDR policy was steering the Nigerian economy in the right direction and supporting growth, the health pandemic  and disruption it brings has impacted the effectiveness of this tool.”