World Bank warns CBN against direct lending, FX control,subsidy programmes
The Central Bank of Nigeria (CBN) has been forewarned by the World Bank against direct loan involvement and foreign exchange (FX) regulation, stating that these actions may jeopardize the nation’s monetary policy.
The monetisation of the fiscal deficit, direct loan interventions, untargeted subsidy programs, and foreign exchange controls are a few examples of such unconventional initiatives.
According to the World Bank, the region’s monetary authorities continue to struggle with inflation, especially in nations with weak financial systems, a sizable informal sector, and a lack of coordination between monetary and fiscal policy.
In its Africa’s Pulse report, released on October 5, 2023, the World Bank said that “uncoordinated policy interventions – such as the monetizing of the fiscal deficit, direct lending interventions, untargeted subsidy programs, or foreign exchange controls – are also fueling inflation in some Sub-Saharan African countries.”
The World Bank’s warning comes as the CBN has been under increasing pressure to intervene in the economy to help cushion the effects of rising inflation and a weakening naira. In recent months, the CBN has taken a number of steps to support the naira, including raising interest rates and restricting access to FX.
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Despite a predicted drop from 9.3 percent in 2022 to 7.3 percent in 2023, double-digit inflation still affects 18 countries.
The impact on households—particularly the poor, who spend a large portion of their income on food—as a result of rising food and fuel prices and weakening home currencies was highlighted in the report.
However, the World Bank has warned that direct lending intervention and FX control could have unintended consequences. For example, direct lending intervention could lead to higher inflation, while FX control could discourage foreign investment and hurt economic growth.
The CBN has been encouraged by the World Bank to concentrate on its primary goal of maintaining price stability and to refrain from meddling in the economy in ways that would jeopardize its monetary policy.
Recent monetary policy in Nigeria has been geared toward reducing inflation and bolstering the naira. In recent months, the Central Bank of Nigeria (CBN) has taken a variety of actions, including hiking interest rates and limiting access to foreign exchange.
The CBN increased the Monetary Policy Rate (MPR) from 15.5% to 16.5% on July 26, 2023. The CBN increased interest rates for the third time in a row. In an effort to restrict the availability of money and lower inflation, the CBN has also raised the Cash Reserve Ratio (CRR) and Liquidity Ratio (LR).
The CBN has taken moves to limit access to FX in addition to boosting interest rates. The CBN forbade the sale of foreign exchange to Bureau de Change (BDC) operators in June 2023. The quantity of FX that banks can sell to their customers is likewise subject to restrictions set by the CBN.
For certain nations (such as South Africa, Kenya, and Uganda) where inflation is close to or already within the central bank’s target range, fine-tuning monetary policy to bring inflation under control without resulting in unneeded hardship and job losses is crucial.
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