IMF, Fitch Ratings applaud MPC hawkish rate decision, says Tinubu inherited bad economy

International Monetary Fund (IMF) and the Fitch Ratings have unanimously applauded the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) for its hawkish decision in hiking benchmark rate by 400 basis points.

IMF said, the decision will help contain inflation and pressure on the naira, and that, is a step in the right direction, stressing that President Bola Tinubu inherited a difficult economic situation from his predecessor.

In a similar vein, Fitch Ratings on Tuesday said the recent 400 basis points increase, to 22.75 per cent, in Nigeria’s Monetary Policy Rate (MPR) marked progress in the country’s effort to contain inflation.

The Monetary Policy Committee (MPC) of the CBN increased the policy rate by 400 basis points to 22.75 per cent for a total tightening of 1,025 basis points since May 2022.

“The new government inherited a difficult economic situation marked by low growth, low revenue collection, accelerating inflation, and external imbalances built up over years,” the report stated.

On its part, Fitch Ratings supported the monetary policy tightening by the CBN.

In a report, the rating agency said it would also support a more market-determined exchange rate, even though real rates remained negative and the exchange rate was still subject to downward pressure for now.

Earlier in November 2023, Fitch had highlighted low net reserves and weaknesses in the exchange-rate framework as constraints on the sovereign’s credit profile and then affirmed Nigeria’s rating at ‘B-’ with a Stable Outlook.

However, in its latest release, the agency said the large MPR increase on 26-27 February, and accompanying moves to raise the cash reserve ratio for commercial banks to 45 per cent, from 32.5 per cent, were steps towards containing inflation.

It reiterated that CBN also widened the asymmetric corridor around the MPR, which could limit interest rate pass-through.

The report said, “Fitch expects the CBN to continue tightening policy in the near term, which seems necessary to more fully control inflation as rapid credit and money-supply growth suggests a still-loose monetary context.

“Such a tightening will still face implementation challenges, partly due to the potential for countervailing political pressure. 

However, without further sizeable monetary tightening, it may be difficult to achieve macroeconomic stability – real interest rates remain negative, deterring inward portfolio investment.”

Fitch also projected the rate of inflation to rise further in the first half of 2024, before moderating in the second half, partly reflecting base effects as well as its assumption that the naira’s depreciation will slow in 2024, compared with H2,23, before a stabilisation of the currency by year-end.

It stated that the currency’s sharp depreciation since mid-2023, including the large loss of value in January, and slow monetary policy response had raised inflation expectations.

Fitch said with security challenges in the North-east of the country and higher transport costs also adding to price pressures, it was forecasting inflation to average 26 per cent in 2024.

Recent CBN policy tightening, coupled with exchange-rate adjustments, it said, signalled initial efforts to address foreign exchange (FX) scarcity and restore business confidence.

Fitch stated, “The CBN governor has announced plans to clear a backlog of unsettled FX forwards ‘in the next few days’, having settled only $400 million of an outstanding $2.2 billion, based on CBN estimates, as of late February.

“Nonetheless, the CBN’s weak net reserve position will continue to hamper liberalisation of the forex market and we expect forex scarcity to persist through 2024. Even if the authorities resolve the backlog of forex forwards, it will take time for investor confidence in the FX market to return, especially if transparency over exchange rate and monetary policy remains poor.”

According to the report, recent measures, if continued, may ultimately strengthen the sovereign’s medium-term growth prospects and capacity to attract external financing.

Fitch said when it affirmed Nigeria’s rating in November last year, it stated that improved credibility and consistency in monetary policymaking and forex management, resulting in a sustained reduction of inflation and distortions in the forex market, could lead to positive rating action.

The report added, “While the authorities are taking steps to address the challenges in the monetary and forex market, years of unorthodox policy approaches and financial repression under the previous government have weakened investor confidence in the economy.

“A lack of policy coordination remains a risk for the reform drive. Notably, Fitch expects fiscal consolidation to be limited in the near term, constrained by political pressure on the government to improve infrastructure and provide support to households amid high inflation. This could weaken the effectiveness of policies designed to curb inflation and improve FX liquidity.”