Is Nigeria’s economy finally on the right track? Recent comments from CFG Advisory CEO Adetilewa Adebajo suggest that stability in the forex market and fuel prices could signal a welcome downward trend in inflation. But are there still challenges ahead?
Here’s a quick rundown of the key takeaways:
- Positive Signs: Forex stability and adjusted fuel prices are seen as major factors that could bring down inflation.
- CBN’s Move: The decision to hold the monetary policy rate is considered a good move to allow for clearer economic insights.
- Debt Concerns: High government expenditure and debt levels remain significant challenges.
- Transparency Boost: Improvements in transparency within Nigeria’s forex system are seen as a positive step.
- Potential Rebound: There’s optimism for an economic rebound towards the end of the year if current trends continue.
Adebajo’s Optimistic Outlook on Inflation
According to Tilewa Adebajo, the trajectory of inflation is likely to go downward in the next couple of months. The CFG Advisory CEO says that with forex stability and fuel prices now determined, inflation is on the decline.
Why the CBN’s Decision is a ‘Welcome Development’
Adebajo has praised the Central Bank of Nigeria (CBN) for deciding to hold the monetary policy rate. He believes this is a necessary step for the economy to gain some much-needed clarity. In a recent interview with Arise News, he delved into topics like forex stability, inflation trends, and the pressing need for better policy coordination to tackle Nigeria’s fiscal issues.
“I think the holding of the rate is a welcome development. The reason why is, I think it’s important that the central bank takes a look at the view because there are leading and lagging indicators in the economy, and inflation is a lagging indicator. If we look at it in the next three months, it would give time to give a clearer dimension on the economy,” he stated.
Good News: Real Interest Rates Are Now Positive!
Adebajo also pointed out that real interest rates in Nigeria are now positive. This means that interest rates are actually higher than the inflation rate, which is a good thing for financial assets.
“On the other side, on face value, what is important now is the fact that real rates are positive in Nigeria as a question of fact—that interest rates are higher than inflation—and so we have value with finance assets within the financial market,” he added.
When Can We Expect Interest Rates to Drop?
Adebajo explained that monetary policy is always driven by the prevailing economic conditions. To stimulate growth, the economy might have to go through a period of tightening first. Once things stabilize, then they can think about lowering rates.
The Key Factors Influencing Inflation
According to Adebajo, the two biggest factors affecting inflation right now are foreign exchange rates and fuel prices. Now that there’s more stability in the forex market and fuel prices have been adjusted, he believes inflation should start to come down in the next couple of months.
Concerns About Government Spending and Debt
Despite the positive signs, Adebajo did raise concerns about the government’s spending habits and the country’s growing debt levels. He noted that the budget has a huge deficit, and debt service is costing a fortune. He warned that the current level of debt is simply not sustainable.
“The key problem we are facing is government expenditure. If you take a look at the budget that has just been passed, there is a cumulative deficit of close to N40 trillion, and debt service is about N16 trillion. We have hit a ceiling of debt of N150 trillion. This is clearly unsustainable,” he warned.
The Need for Stronger Policy Coordination
Adebajo also emphasized the importance of having well-coordinated policies to support macroeconomic adjustments. He believes that transparency in the forex system is crucial for building economic confidence. He highlighted the Bloomberg terminal and the FX Code as key developments in this area.
“We now have transparency in the FX system—the Bloomberg terminal and the FX Code. The FX Code was signed by the Chairman of the banks, the managing directors, and the Central Bank. I believe what the Central Bank needs to do is not to be afraid to sanction banks, bureau de change, and anybody that messes around. If we do that, the continued stability we see in the foreign exchange system will be sustained,” he stated.
Optimism for an Economic Rebound
Adebajo ended on a positive note, expressing optimism about Nigeria’s economic future. He believes that if the country continues on its current path and nurtures the economy properly, there could be a rebound by the end of the third or fourth quarter of the year.
Of course, it’s worth remembering that economic forecasts should be taken with a pinch of salt. In 2023, the World Bank predicted slower growth for Nigeria due to factors like high inflation and policy uncertainties. It will be interesting to see how accurate Adebajo’s predictions are.
Transparency in Forex: A Game Changer?
The FX Code, signed by key players in the banking sector and the Central Bank, is a major step towards ensuring accountability. Will this be enough to curb the bad actors and maintain stability in the forex system?
Looking Ahead: Can Nigeria Sustain This Momentum?
Nigeria’s economy has faced numerous challenges in recent years, from fluctuating oil prices to the impact of the COVID-19 pandemic. According to Trading Economics, inflation in Nigeria decreased to 33.69% in April of 2024. The big question now is whether the country can sustain this positive momentum and achieve a genuine economic rebound. Strong policy coordination and fiscal responsibility will be essential to navigate the challenges ahead.
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