Certain decisions taken by the Monetary Policy Committee ,MPC , of the Central Bank of Nigeria,CBN, on September 23 and 24, 2024, have continued to generate heated controversy among financial analysts,institutions as well as economic agents both at home and abroad ; till now the dusts raised by this controversy are yet to stttle down .
But is there any cause for any alarm ? The meeting was to evaluate recent economic and financial trends, as well as to assess potential risks to Nigeria’s economic outlook. At the end of the crucial meeting which was intended to manage the country’s skyrocketing inflation rate and other sensitive aspects of the economy . To achieve this objective ,out of the 12 members, 11 that were present at the meeting some key decisions including the need to further tighten monetary policy by increasing the Monetary Policy Rate from its previous level to 27.5 per cent from 26.75%.
Other decisions were to retain the asymmetric corridor around the MPR at +500/-100 basis points, In addition to the MPR hike, the MPC also voted to raise the Cash Reserve Ratio (CRR) for Deposit Money Banks (DMBs) from 45% to 50%, and from 14% to 16% for Merchant Banks but maintained the liquidity ratio at its current level of 30 per cent.
Definitely ,the hike came against the backdrop of most analysts’ projections of a hold on rates .But is there any cause any alarm ?
For the CBN, surely ,there is no cause for any alarm.The apex attributed the hike in MPR to persistent inflationary pressures. “The committee expressed concern that despite recent moderation in headline inflation, core inflation remains high, indicating that inflationary pressures are far from easing”, the apex bank said in a statement on Tuesday.
The MPC acknowledged the slight moderation in headline inflation in July and August 2024, largely due to a decline in food inflation.However, members expressed concern over the rising energy prices, which continue to drive core inflation upward. “The persistence of inflationary pressures, particularly in the core segment, remains a severe concern to the committee. Addressing the upward pressure on energy prices is crucial to stabilizing inflation,” the CBN stated.
“Our decision to raise the Monetary Policy Rate (MPR) to 27.25% was a bold move. Higher interest rates, while painful for borrowers, are necessary to curb excess money in circulation and control inflation. Leadership is about making hard choices to secure long-term stability over short-term comfort in moments like these”,Cardoso explained .
A review of the governor’s address and outlined the five key reasons behind the CBN’s decision to maintain its hawkish stance.
1.Persistent Core Inflation pressures
While headline inflation in Nigeria showed some moderation in recent months, core inflation remains stubbornly high, driven by the rising costs of energy. The CBN reported that headline inflation eased to 32.15% in August 2024, down from 33.40% in July, mainly due to a reduction in food inflation. However, core inflation, which excludes volatile items like food, actually increased to 27.58% from 27.47% during the same period. The CBN emphasized that core inflation needs to be addressed because it reflects the underlying inflationary pressures in the economy: “Core inflation has remained elevated, driven primarily by rising energy prices”.
2. Managing excess liquidity and foreign exchange demand
Nigeria’s growing money supply has led to excess liquidity in the financial system, which is putting pressure on the foreign exchange market. The CBN noted that addressing this liquidity glut is critical to reducing demand pressures on foreign exchange, which could otherwise destabilize the naira.
They noted that “the continued growth in money supply” was causing a rise in liquidity, necessitating the tightening of monetary policy to prevent further depreciation of the currency. The external reserves have seen some improvement, standing at $39.07 billion as of September 19, 2024, up by 17.4% compared to $33.28 billion in the same period of 2023. This reserve position represents 8 months of import cover for goods and services. Stabilizing the naira is crucial to maintaining this reserve level and preventing capital flight.
3. Stabilizing the exchange rate and enhancing investor confidence
One of the key successes of the CBN’s hawkish stance has been the stabilization of the exchange rate. The bank has managed to reduce volatility across different segments of the foreign exchange market, which is critical for fostering investor confidence and encouraging long-term planning. The MPC pointed out the “relative stability and convergence in the exchange rate across the various market segments”, attributing this stability to the tight monetary stance. By stabilizing the exchange rate, the CBN says it aims to enhance Nigeria’s attractiveness to international investors, especially as inflation moderates. The CBN also states that maintaining a strong currency is essential for encouraging foreign direct investment (FDI) and bolstering economic growth.
4. Aiming for a positive real interest rate to attract investments
Another reason the CBN gave is that it is keen on making Nigeria a more attractive destination for foreign investment by achieving a positive real interest rate. Despite the recent moderation in headline inflation, Nigeria’s real interest rate remains negative.The MPC acknowledged that this was a problem for drawing international capital into the economy. To change this, they stressed the importance of sustaining efforts to make the real interest rate positive, stating: “To attract investments into the economy, efforts must be sustained to achieve a positive real interest rate”. This means that even after inflation, investors should see a net positive return on their investments. With global competition for capital fierce, a positive real interest rate would significantly enhance Nigeria’s attractiveness on the international stage.
5. Concerns about the growing Fiscal Deficit and impact of FAAC releases
The CBN also raised alarms about Nigeria’s growing fiscal deficit and how it impacts the liquidity in the banking system.
The Federation Account Allocation Committee (FAAC) releases funds to various tiers of government, and these releases inject large sums of liquidity into the system, which can disrupt monetary policy efforts .The CBN highlighted a “strong correlation between FAAC releases and liquidity levels in the banking system as well as its impact on the exchange rate”, making it crucial to monitor these releases carefully.
In the broader context of Nigeria’s fiscal situation, the MPC noted concerns about the rising fiscal deficit but welcomed the fiscal authority’s commitment not to resort to monetary financing (printing money). Still, with excess liquidity from FAAC releases feeding into the system, tighter monetary policy is essential to prevent these liquidity injections from pushing inflation higher
MPC Gets World Bank Backing
The World Bank has lauded the reforms led by the Central Bank Governor, Yemi Cardoso, noting that his monetary policies are steering the country in the right direction.
Indermit Gill, Senior Vice President of the World Bank Group, made this statement during the 30th Nigerian Economic Summit organized by the Nigerian Economic Summit Group on Monday in Abuja.Gill commended the CBN governor for his approach to managing inflation, pointing out the 850 basis point increase in interest rates over nine months.
He emphasized that implementing such comprehensive reforms requires a strong commitment from the political leadership of the country. “Implementing such a far-reaching reform is impossible without a solid political commitment from the top. The price of PMS has quadrupled since the subsidy cut, imposing terrible hardship across the breadth of Nigeria’s society.
“The Central Bank has had to hike its policy by a huge 850 basis point, almost 9 percentage points in the last month to boost confidence in the naira and anchor inflationary expectations. “The Central Bank financing of fiscal deficit has finally ended, and Governor Cardoso has been putting Nigeria or helping to put Nigeria on the right course,” Gill said.
Speaking further, the World Bank noted that Nigeria has to stay the course for there to be a meaningful return and reward on the lives of the citizens. Gill said it will take the country at least 15 years before the policies begin to bear fruits and make Nigeria a global engine in the Sub-Saharan African region. He added that this is how countries such as India, Poland, Norway and others achieve economic development and transformation.
“But this is only the beginning, Nigeria will need to stay the course for at least 10 to 17 years to transform its economy. If it does that, it will transform its economy. “And it will become an engine of growth in Sub-Saharan Africa. And he will help to transform Sub-Saharan Africa. It’s very difficult to do these things, but the rewards are massive. “This is the lesson from the last forty years as well as the experience of countries such as India, Poland, Korea and Norway,” Gill said.
MAN NOT EXCITED
But the Manufacturers Association of Nigeria has called on the Central Bank of Nigeria to stop increasing the monetary policy rate and instead explore a monetary-fiscal option to bring down inflation.
In a statement on Thursday, the Director General of MAN, Segun Ajayi-Kadir, said the recent hike in interest rate to 27.25 per cent would worsen the already challenging operating environment for manufacturers in the country.
Ajayi-Kadir said, “The decision to raise the MPR to 27.25 per cent has far-reaching implications for the manufacturing sector in Nigeria. The continued increase in interest rates, which now totals 15.75 percentage points since May 2022, would compound the challenges faced by the sector, including rising production costs in the face of declining consumer purchasing power.
“With the increase in borrowing costs, manufacturers will now pay over 35% on their credit facilities. Clearly, this will lead to an increase in production costs, higher prices of finished goods, lower competitiveness and production capacity expansion.”He added that the manufacturing sector’s grappling with rising production costs and shrinking consumer demand due to declining purchasing power also compounds the problem.
“For instance, over the first six months of the year, manufacturers incurred more than N730 billion in capital expenses due to the continuous rise in interest rates imposed by commercial banks. This dilemma hampers innovation, productivity and growth. Moreover, the manufacturing sector is grappling with depressed consumer demand, primarily driven by lower purchasing power,” the MAN DG said.
Ajayi-Kadir cited MAN’s half-year economic review and explained that unsold goods in the manufacturing sector surged by 42.93 per cent, reaching N1.24tn in the first half of the year, reflecting the severity of the challenges faced by industry players, as higher interest rates limit access to funds for critical investments in retooling, technology, and capacity expansion. The CBN’s persistent monetary tightening stance means businesses must cope with higher borrowing costs. Increasing the CRR for banks means more loanable funds have been sterilised. This further impairs the financial intermediation capabilities of banks.
It has grave implications in an economy where businesses are already reeling from high energy, logistics, and operating costs compounded by declining purchasing power that has forced some multinationals to abandon Nigeria.
ANALYSTS ARE DIVIDED
The CBN MPC’s continued hawkishness and commitment to inflation-targeting have been condemned by some analysts. According to these analysts while the CBN policy hike might be necessary it is believed by them to be ineffective in reducing inflation risks driven by structural factors such as insecurity, climate risks, PMS scarcity, and energy costs.The premise behind inflation targeting globally is straightforward. Monetary authorities aim to guide economic agents’ expectations and behaviour by establishing a clear and measurable inflation goal, fostering stability and preventing mission drift.
However, a critical examination of Nigeria’s economic landscape suggests that the current approach to inflation targeting has not been the most suitable path.
One primary concern is the quality of Nigeria’s inflation data. Inflation targeting relies heavily on accurate and timely inflation figures to make informed policy decisions. Unfortunately, Nigeria’s inflation data may not meet the necessary standards to support such a framework. A professor of economics put it right: the quality of Nigeria’s data on inflation does not support inflation targeting; the current approach via monetary aggregate is preferable within the current context. The theoretical preference for a single-digit inflation rate in Nigeria, defined as less than 10% by past monetary authorities, aligns with the idea that moderate inflation can be conducive to economic growth. However, the challenge lies in the actual achievement of this target. Nigeria has struggled to keep inflation within single digits, raising questions about the effectiveness of inflation targeting in the current economic environment.
The argument against inflation targeting goes beyond numerical thresholds. Economic performance depends on many factors, and a double-digit inflation rate does not necessarily imply poor economic health. Prof Ekpo has argued, ‘ An economy may have double-digit inflation, yet economic performance may be satisfactory. It depends on other economic fundamentals. Inflation targeting is not necessary. Ghana and South Africa have been on inflation targeting, yet there is no significant impact on their economies. This questions the universal applicability of the strategy.
A key factor in moderating inflation may lie in the money supply growth. Utilising instruments within the money supply framework could provide an effective means of controlling inflation. However, it is essential to recognise the nuanced nature of inflation in Nigeria, stemming from cost-push factors, supply chain issues, and exchange rate pass-throughs. Simply hiking interest rates, such as the Monetary Policy Rate (MPR, currently at 18.75%), may not be the panacea, especially when real interest rates are already negative. Instead, a more comprehensive approach could be explored, including adjusting savings rates to encourage investments.
Nonetheless, analysts like Dr Adedipe argued that the CBN should realistically set the target at 15% for the near term (2024) and 6-9% in the medium term and going forward (2025 and beyond).
The consensus among financial analysts is that the CBN’s return to the basics of monetary policy targeting must be explicit on commitment and approach. Dr Adedipe placed it in proper perspective when he observed that, ‘Year-in and year-out, inflation targets must be set, along with consequences for missing the target. This singleness of focus should prevent the apex bank from going on mission drift’.
Critics argued that the rate hikes could stifle productive activity and burden borrowers, but Cardoso stood firm, emphasising the need to prioritise slowing down inflation.
CONCLUSION
In his opinion, inflation is a tax on the income of poor Nigerians and should be the number one priority of the CBN. Over the past eight years, the money supply has grown in double digits despite GDP growth averaging less than two per cent over the same period.
This growth in money supply was a key factor fueling the surge in inflation. In response to this challenge, Cardoso has worked to curb the growth in money supply, and so far, it seems his efforts to contain inflation are yielding fruit. Headline inflation eased to 32.15 percent in August, the second consecutive month of decline, suggesting that Cardoso’s hawkish stance may be tempering inflationary pressures.
Highlighting key leadership lessons, Cardoso said, “Leading through challenging times means avoiding the temptation to take on too many initiatives. The central bank must focus on its core mandate—price stability. It is easy to become distracted by various political and economic pressures, but as a leader, one must prioritise.
Moreover ,that is the dilemma of monetary policy; the monetary authorities can only target two of Unemployment, Growth and Inflation at any fiscal point in time.
His achievement in the growth element of the triune is seen from his role of keeping the growth forecast positive for the economy going forward.
But perhaps the biggest achievement of Cardoso, giving the recent history of the banking system, is maintaining domestic financial stability and prevented systemic risk, which is the risk that an event will trigger a loss of confidence in the financial system.
