Nigerian MPC Member Turns on Central Bank over Policy Paradox

LAGOS (Capital Markets in Africa) – Nigeria is undermining its own efforts to tame inflation and strengthen the naira by “pretending” to tighten policy while boosting the money supply, a member of the Monetary Policy Committee said in an extraordinary attack on the central bank published a day before the first interest-rate decision of the year.

While the MPC raised the benchmark interest rate to a record 14 percent last year, the central bank’s management was also lending to the government and trying to prop up sectors of the economy through so-called intervention funds, pumping liquidity into the market, Doyin Salami said.

“At the same time as we have sharply raised liquidity, largely through an almost unceasing flow of liquidity from intervention funds and lending to the government, monetary policy has pretended to tighten,” Salami said after the MPC’s Nov. 21-22 meeting, according to a central bank statement published Jan. 23. “Evidence that the injection of liquidity has overwhelmed any efforts at tightening is manifested in the continued slide in the naira’s rate of exchange and rising inflation. Worst of all, this position has resulted in an almost complete erosion of the central bank’s credibility.”

Nigeria’s MPC announces its next decision Tuesday in Abuja, the capital, with all 16 economists in a Bloomberg survey predicting it will hold the main rate at 14 percent. Governor Godwin Emefiele has battled to control inflation, which is at an 11-year high of 18.6 percent, while supporting an economy that probably contracted last year for the first time in more than two decades, according to the International Monetary Fund.

The regulator’s stance is creating “a gap between central bank management, which has sole responsibility for intervention funds, and the Monetary Policy Committee,” said Salami, who is an academic at Lagos Business School and has previously criticized Emefiele’s policies.

Deputy Governor Sarah Alade said at the same November meeting that the foreign-exchange regime adopted when the naira was devalued in June was failing and needed to be “fine-tuned” to attract inflows.

While the naira has fallen almost 40 percent since June to around 315 against the dollar, traders say the central bank is still manipulating the exchange rate and maintaining capital controls. The currency has plummeted to 498 against the greenback on the black market as shortages of the foreign-exchange mount.