We need to know when to opt out of optimising!

The Central Bank’s bold decision to court foreign portfolio investment (FPI) and tackle inflation head-on by increasing the Monetary Policy Rate (MPR) for the second consecutive time has sent shockwaves through the economic landscape. It is a battle of wills, with inflation stubbornly holding its ground despite the Central Bank’s efforts.

Yet, amidst the struggle, there is a glimmer of hope. The surge in FPI flows is undeniable, breathing new life into the Nigerian economy and visibly influencing the value of the naira. But this is not just a game of numbers—it is a high-stakes gamble with the future of the nation’s economy hanging in the balance.

“Practically, there is no magic formula dictating the perfect time to pull the plug on optimization. Rather, it is the response of economic indicators turning off the anticipated path that signals the need for a strategic pivot away from relentless optimisation of monetary tightening policies.”

On one hand, there’s the promise of stability and growth, as the Central Bank seeks to attract vital investment and rein in inflation. But lurking beneath the surface is the ever-present danger of relying too heavily on monetary policy alone to drive economic prosperity.

As inflation maintains its steadfast grip, the pressure on the Central Bank intensifies. Every move is scrutinised, and every decision is weighed against the backdrop of uncertainty. The stakes have never been higher, and the need for careful consideration and strategic planning has never been more apparent.

In this intricate dance of monetary manoeuvring, one thing remains clear: we need to know when to opt out of optimising. In the relentless pursuit of economic optimisation, the Central Bank must navigate a delicate balance, mindful of both the risks and the rewards that lie ahead.

Practically, there is no magic formula dictating the perfect time to pull the plug on optimization. Rather, it is the response of economic indicators turning off the anticipated path that signals the need for a strategic pivot away from relentless optimisation of monetary tightening policies.

Time and again, these indicators serve as the compass guiding policy makers through the fog of uncertainty. And when they diverge from the predicted trajectory, it is a telltale sign that the optimisation game may have run its course.

Take, for instance, the monetary manoeuvres in February 2024. As reported earlier by BusinessDay, the policy shift towards tightening the monetary policy by increasing MPR by 400 basis points from 18.75 percent to 22.75 percent saw a surge in foreign portfolio investment (FPI), surpassing the $1 billion mark. It was a glimmer of hope amidst the economic turmoil, breathing fresh life into the Nigerian economy.

The impact reverberated through the markets, with the value of the naira experiencing a notable uptick, climbing from N 1616.83 to N1,251.7, according to data from NFEM as of April 4. It was a tangible validation of the effectiveness of the policy adjustment, fueling optimism among investors and policymakers alike.

Buoyed by this positive momentum, the Monetary Policy Committee (MPC) found itself at a crossroads. With the winds of change blowing in their favour, they opted for further recalibration, nudging the Monetary Policy Rate (MPR) upwards by another 200 basis points, from 22.75 to 24.75 percent in March 2024.

While the outcome of this latest policy review is yet to be unveiled in terms of FPI inflows, the trajectory seems clear. More FPI inflows are on the horizon, drawn by the allure of high returns amidst projected risks and relative stability. The initial increments served as a beacon, attracting investors like moths to a flame, their appetite whetted by the promise of lucrative returns.

And it is not just domestic investors clamouring for a piece of the pie. The oversubscription of Republic of Benin securities underscores the broader appetite for investment opportunities in the region, further bolstering confidence in the efficacy of the policy adjustments.

Yet, amidst the euphoria, a note of caution rings clear. While optimisation may yield short-term gains, it is long-term sustainability that demands scrutiny. The delicate balance between risk and reward must be carefully calibrated, with each policy adjustment weighed against its potential ramifications.

In this ongoing saga of monetary policy optimisation, one thing remains certain: the need for vigilance. Economic indicators may offer clues, but it is the astute judgement of policymakers that will ultimately steer the ship through uncharted waters.

As the dust settles on yet another policy adjustment, one cannot help but wonder: when will the music stop? Perhaps there’s no definitive answer. Perhaps it is the ever-shifting sands of economic reality that dictate the tune. But one thing’s for sure: in the game of optimisation, knowing when to bow out gracefully may be the ultimate victory.

Regrettably, Nigeria’s inflation has surged for 13 consecutive months, hitting a new peak at 31.7 percent in February 2024, as reported by the National Bureau of Statistics (NBS). Since the Central Bank of Nigeria (CBN) adjusted the Monetary Policy Rate (MPR), the inflation rate has been on a relentless climb.

In December, it stood at 28.92 percent, escalating further to 29.9 percent in January and surging to 31.7 percent in February 2024. BusinessDay projections show that the inflation rate might further increase by 1.28 percent, palpable at 32.98 percent in March, among other things. This concerning trend exceeds the CBN’s projected inflation rate target of 21.4 percent for the year 2024, signalling challenges ahead.

Recent events in Nigeria challenge conventional economic wisdom regarding the relationship between the Monetary Policy Rate (MPR) and inflation. Contrary to traditional beliefs and the objectives set by the Central Bank of Nigeria (CBN), it’s become apparent that there’s a direct correlation between MPR adjustments and inflation rates in the country.

This phenomenon challenges the Quantity Theory of Money, which posits an inverse relationship between MPR and inflation. In practical terms, when the MPR is raised, instead of curbing inflation, it seems to exacerbate it.

This shift in understanding highlights the need for a nuanced approach to monetary policy, one that takes into account the multifaceted nature of economic forces at play.”

It is crystal clear now that CBN policy has impacted both the exchange rate and FPI rather than inflation. At this juncture, the question of concern is still: when should we opt out of optimisation?

Based on the essential indicators and utilising positive economic data from the past and present to inform future decisions, it appears likely that the Monetary Policy Committee (MPC) may consider raising the Monetary Policy Rate (MPR) by a few basis points within the next month or so. If this persists, it might lead to cobra effects—a situation where an attempted solution to a problem ends up creating unintended consequences or making the original problem worse.

“Raising the Monetary Policy Rate (MPR) is not the sole method of attracting inflows of dollars. Various reports have indicated that economic sustainability hinges on the effectiveness of both monetary and fiscal policies, among other factors,” said an economist who preferred not to be named.

He further added, “Cardozo and his team have been doing what is necessary and will continue to do so, but overreliance on monetary tightening policies may destabilise local firms and exacerbate economic woes by increasing Nigeria’s dependence on foreign goods.

This, in turn, could undermine the concentrated efforts and energy directed towards generating dollars via Foreign Portfolio Investment (FPI), as trade imbalances may repatriate dollars through imports.”

Lawode Gbenga, an information and technology economist, emphasised, ‘When designing policies, it is imperative to analyse them from a 360-degree perspective rather than just 180 degrees to avoid unintended consequences, akin to the ‘cobra effect.’ Thus, the ability to discern when to opt out of any optimisation policy becomes essential for sustainability.’

He further remarked, ‘Although it’s not news that foreign portfolio investment (FPI) can provide short-term liquidity and capital inflows, it may not necessarily contribute to the long-term sustainability of an economy. This aligns with John Maynard Keynes’ analysis that ‘in the long run, we are all dead.’ Kudos to Cardozo and his team for their brevity in saving Nigeria’s naira, but it’s essential to recognise that this approach may not ensure sustained economic stability.’

However, opting out of this policy may save the nation from 13 consecutive months of rising inflation rates, which can be traced to cost-push rather than demand-pull factors. At this critical point, fiscal policy should effectively step in to augment the situation by enhancing effective supply-side policies, supporting domestic production, and waging war on oil theft,’ Gbenga added. “