By Babajide Komolafe

An economic expert has recommended further tightening of the Monetary Policy Rate (MPR) raised  by 50 basis points to 8.5 per cent even as  the Monetary Policy Committee (MPC) of the Central Bank of Nigeria meets this week to review economic conditions and decide whether to further tighten money supply.

“We would recommend at least a 50 bps tightening, taking the Monetary Policy Rate to 8.5 per cent,” said Razia Khan of Standard Chartered.

The MPC at its meeting in June raised the MPR to 8.0 per cent from 7.5 per cent and the Cash Reserve Requirement (CRR) of banks to 4.0 per cent from 2.0 per cent in anticipation of further rise in inflation.

But the inflation figure released by the Bureau of Statistics indicates a reduction in inflation to 10.2 per cent in June from 12.4 per cent in May.

Khan, who is the Regional Head of Research for Africa in the Global Research Department of Standard Chartered said while there is decline in inflation; recent appreciation of the naira at the interbank market and likelihood of fiscal consolidation due to the appointment of Dr. Ngozi Okonjo-Iweala as Minister of Finance have occasioned expectation of that, further tightening of money supply and MPR increase are less likely,“ none of these reasons provide sufficient justification for the Monetary Policy Rate to be kept on hold at 8 per cent just yet.”

She said: “While hopes for fiscal consolidation may be running high, significant progress remains very unlikely in the short-term. The increase in the minimum wage to N18, 000 from a previous N7,500 nationally, will take effect in August.

Nigeria is still awash with liquidity, with a record N1.317 trillion (USD 8.72bn) distributed at the last monthly Federal Accounts Allocation Committee (FAAC) in July.

This comprised N471 billion (USD 3.1bn) of statutory revenue – mainly oil earnings, N52.5 billion (USD 0.35bn) of VAT and N710.7 billion (USD 4.7bn) of excess crude account savings, representing the arrears of budget augmentation due for the months of January-April 2011.

Even with the best fiscal intentions, it may take several months before Nigeria sees meaningful progress in spending cuts. Any new Bill will have to be passed by the National Assembly before being signed by the President. Deliberations might be lengthy.

Moreover, state governments – now forced to implement the new national minimum wage, have argued for a change in the revenue sharing formula to allow them to do so.  Fiscal pressures appear ‘baked in the cake’ so to speak – once introduced, it is a difficult task to rein them in.

“Finally, it is not clear that the foreign exchange rate remains a benign influence on inflation despite naira appreciation on the CBN WDAS (the bi-weekly Wholesale Dutch auction) and interbank markets.

Following the official restriction on sales of WDAS funds to the Bureaux de Change (BDCs), dollar-naira exchange rates charged by the BDCs have reportedly spiked higher to N167, reflecting tighter foreign exchange supply.

But an increased spread between the official and parallel markets raises the risk of ‘round-tripping’, sourcing official funds for onward sales on the parallel market. No system is entirely leak-proof, and sustained pressure on the parallel market suggests there is still a strong need for further tightening in Nigeria. Real interest rates are still negative after all.”