What CBN should do to achieve macroeconomic stability~NESG
The Nigerian Economic Summit Group (NESG) has said that the core of the country’s monetary policy stance should be to stabilise the currency, bringing inflation and foreign-exchange rates to a level that is consistent with sustainable growth, and promoting good management of the banking system.
In its economic outlook for 2021, the economic group said reason for its recommendation is that the country is at an early stage of recovery from an economic recession.
Independence of Central Bank
An independent monetary authority typically exists when the Central Bank can implement monetary policy decisions without direct or perceived political interference. Promoting this should be a focal policy point.
Stabilisation of domestic currency
For an economy, having an unstable currency is harmful to growth as it causes inflationary pressure and depletion of resources.
As a result, there are few options to stabilise the currency, including discontinuing the multiple FX windows and setting the
exchange rate close to the I & E window or BDC rate.
Hence, the CBN should ensure policy clarity and work with the fiscal authorities to develop a foreign exchange policy that supports economic growth and instills confidence.
For government and monetary authorities, the first task should be to achieve a stable price level.
This is because stabilising inflation would help to restore public confidence in the naira and attract more significant investments.
As a result, these are key action points: – Set an annual inflation target for the country at 6-9 percent. In the short
term, a higher single-digit target is encouraged for a recovering economy as it serves as incentives for production.
– The CBN needs to work closely with the Fiscal authorities to address key policy constraints such as multiple taxations, high tariffs etc.
Although, this is not a function of the CBN, they are important in achieving inflation target.
Strengthening the country’s banking system
At this stage, the central bank should focus on creating effective financial intermediation and expansion of coverage. Thus; – Establish rules for transparency and corporate governance in financial institutions; – Formally integrate FINTECHs and other third party non-bank or financial
institutions into the banking system as practised in Kenya, Ghana and South Africa; – Avoid political lending, prevent bad
loans as well as enhance credit supply to key sectors.