The Central Bank of Nigeria basked in a rare euphoria of success on November 24, last year, after the Monetary Policy Committee meeting in Abuja slashed the interest rate from 13 per cent to 11 per cent. The Godwin Emefiele- led CBN also shaved off the Cash Reserve Ratio sharply from 25 per cent to 20 per cent, the deepest cut in the harmonised rate in recent time.
Indeed, it was the first time since 2011 that the apex bank would reduce the rates as the price of crude oil headed southward in the global market. “The decision was taken to engineer growth by increasing the flow of lending to critical sectors of the economy like agriculture, solid minerals, critical social infrastructure and manufacturing,” the CBN governor had said.
It was a good thing that the policy rates were reduced as this made for better management of the economy. The expectation was, however, that the step would empower commercial banks to lend to the small and medium enterprises, the engine room of every economy. This, naturally, was expected to expand their business, create more jobs for the teeming unemployed youths and in return, grow the economy.
Nothing less should be the priority of the CBN, which has the constitutional obligation to deliver price and financial system stability and promote sustainable economic development. However, the announcement of the apex bank, after its MPC meeting in Abuja on Tuesday January 26, that Nigerians would embrace hardship in the new year as witnessed in 2005, has thrown up certain twists and turns that threaten to drag the fate of SMEs and, indeed, Nigerians to the mud.
Apart from warning Nigerians that the hardship may last for eight months or more like it did in 2005, the CBN says the development will necessitate huge sacrifices from Nigerians. The CBN governor said, since oil prices had been on a steady decline from $114 per barrel in July 2015 to $30.25 per barrel on Tuesday, this week, certain tradeoffs would have to be envisaged and accommodated.
In other words, it is either the oil price rebounds or the Nigerian economy shuts down, owing to the dwindling fortunes of the country’s Internally Generated Revenue. Emefiele also stated that the CBN was currently refining the framework for foreign exchange management in order to ensure a more effective and liquid forex market, with utter disregard for the uncertainty in the global oil market.
Economic experts argue that the naira exchange rate and the CBN’s stranglehold monopoly on dollar supply are, in fact, the major determinants in fuel pricing. What that means is that any further depreciation in the naira exchange rate beyond N300/$1 will immediately trigger higher pump prices proportional to the exchange rate differential.
Without any doubt, the scenario mentioned above is a more plausible reflection of real-time market dynamics, as increasing crude oil prices should normally swell our reserves and engender a stronger naira. Curiously, however, the naira exchange rate remained southward between N189 and N199, officially, even with over $60billion reserves.
Ironically, the country’s bountiful reserves brought no relief to the economy, as the exchange rate, unexpectedly, steadily depreciated, notwithstanding prevailing favourable output and crude prices, while fuel prices, conversely, spiralled to induce over N1tn as subsidy payments, annually