The Managing Director/Chief Executive Officer of the Financial Derivatives Company Limited (FDC), Mr. Bismarck Rewane, has warned that sustained monetary tightening could discourage investments and slow down economic growth.
Rewane, therefore, called for an urgent handshake between the fiscal and monetary authorities to avert a situation where continued monetary tightening would lead to economic recession.
He expressed these views in his October 2024 presentation at the Lagos Business School (LBS) Breakfast Session in which he stated that the new minimum wage of N70,000 was a money illusion.
The LBS’ breakfast session presentation was titled, “The World Awaits in Nervous Anticipation….for Madam President?,” an allusion to Vice President Kamala Harris of the Democratic Party winning the November 5, 2024, United States of America’s presidential election.
Arguing that monetary policy was necessary but not enough, Rewane stated that, “sustained monetary tightening can slow down economic growth as higher borrowing costs discourage investment and consumption.”
He, therefore, highlighted that, “the necessity for a handshake between monetary and fiscal policy in Nigeria is critical,” warning that “without this balance, monetary tightening could lead to a recessionary environment.”
According to him, “Businesses are struggling under the weight of high borrowing costs while consumer spending contracts.”
Rewane, also observed that the high cost of borrowing was already taking its toll on the private sector’s economic activities, which contracted for the second consecutive month to 49.8 in September 2024, by 0.2 per cent from 49.9 in August 2024
“The decline is largely attributed to weak consumer demand and rising cost of inputs, amid the lingering inflationary pressures.
“Activities are projected to fall further to 49.7 in October 2024 due to the high-interest environment and expected rise in inflation,” he said.
He stated that the handshake between the monetary and fiscal policies would enable the central bank to focus on controlling inflation through contractionary monetary policy such as higher rates, higher cash reserve requirements (CRR), sales of treasury bills, open market operations (OMO), etc, to mop up liquidity while fiscal measures could target underlying structural problems in the economy, such as insecurity affecting food supply chains, investing in infrastructure and social programs that enhance productivity.
He noted that higher borrowing cost at 33-34 per cent would, “stifle investment growth as businesses adopt a wait-and-see approach focus” and cause a “potential shift in investment.”
Commenting on the minimum wage, Rewane stated that, “a minimum wage hike in an inflationary environment can often be considered a money illusion
“The core issue of rising prices persists, leaving workers with little or no real improvement in their financial situations” because “real wages may not significantly improve due to rising prices.”
He observed that workers have been focusing on the N70,000 nominal value of their minimum wage without considering its real value, which he put at slightly below N53,000 in the face of the current 32.15 per cent inflation rate.
Rewane also warned that the impact of further increase in the pump price of petrol for the market would be heightened inflationary pressures, reduced consumer disposable income, lower consumer demand, and supply chain disruptions.
He also highlighted that the impact of further surge in petrol prices on investors is that “inflation will put pressure on the currency” and cause investors to “become wary of sectors affected by low consumer demand due to petrol price increase.”
But for business and corporate organisations the impact would be “increased cost of production, reduced output, shift to alternative sources of energy like solar.”
He added: “SMEs will be hit the hardest due to lower capital reserves and less ability to absorb increased costs,” which could trigger shutdowns or job losses.
Rewane also projected that the Naira would come under renewed pressure through “persistent forex demand stemming from stockpiling ahead of the festive season, high import demand, and speculative activities.”
He, therefore, recommended that “a scheduled and systematic forex supply program could provide the much-needed support to stabilise the Naira” that have already “fallen to a low of N1,700/$ at the parallel market on September 30.”
Dike Onwuamaeze
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