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By Chinwendu Obienyi
The Central Bank of Nigeria (CBN) has said that curtailing the growth of money supply at this period would contribute to rebuilding monetary buffers to improve the economy’s resilience against future shocks.
A member of the central bank monetary policy committee, Adamu Lametek, stated this in a personal statement contained in the apex bank’s communique of the 291st meeting of the Monetary Policy Committee (MPC) which was released at the weekend.
This is coming after the apex bank had revealed that the total money supply in the country fell slightly for the first time since July 2022 to N55.5 trillion as against N55.6 trillion recorded in April 2023.
Lametek noted that growth in money supply is yet to be adequately curtailed, at least to the benchmarks for the year while adding that due to tightening stance monetary policy to slow credit creation, a fiscal orientation tailored towards reducing public sector borrowing requirements will be immensely helpful.
He said, “Among other benefits, slowing the growth of money supply at this time should contribute to rebuilding monetary buffers to improve the economy’s resilience against future shocks. It is in this context that despite posing a risk to inflation, I see the removal of subsidy on PMS as appropriate as it should significantly reduce the need for monetary accommodation going forward”.
Lametek further noted that strong exchange rate pass-through to inflation continues to be an important factor in the current inflation pressure.
According to him, exchange rate depreciation fuels expectation of consumer price increases in the domestic economy.
“While the pressure on the naira reflects both supply and demand conditions in the foreign exchange (FX) market, I believe that policy tightening would dampen the demand pressure. It could also have a positive impact on autonomous FX supply as domestic yields improve”, Lametek said.
Whilst appreciating the legitimate concern for financial stability in the event of a prolonged monetary tightening cycle, the MPC member stated that he sees this risk as reasonably controlled given the resilience of the banking system.
“At end-April, the major financial soundness indicators (FSIs) – capital adequacy (12.8 per cent), nonperforming loans ratio (4.4 per cent) and liquidity ratio (45.3 per cent) were within their prudential thresholds. Industry earnings ratios have also remained comparatively strong. Nonetheless, there is the need to strengthen macro-prudential buffers.
In particular, I see the need to build countercyclical capital buffers to further improve industry resilience to future shocks. Overall, I believe that the balance of risks continues to be tilted against price stability. As such, maintaining a tight monetary policy stance over the short- to medium- term horizon is ideal”, he said.
