Soaring Inflation and Burden on Monetary Policy

High inflation, rising debt levels and interest rates are all placing burden on monetary policy, writes Obinna Chima

Central banks globally faced with high inflation are tightening monetary policy rapidly to damp demand and bring it into alignment with supply.

Owing to this, many central banks around the world have pivoted monetary policy in order to maintain anchored expectations as Russia’s invasion of Ukraine early this year heightens risks across the world.

Clearly, the eight-month war is exerting a drag on the global economy, as it has led to the surge in energy and food prices, currently driving galloping inflation rate and weighing on economic growth.

At a global level, monetary policy tightening is also proceeding at a rapid pace by historical standards.

In Nigeria, in response to the situation, the Central Bank of Nigeria (CBN) recently raised the Monetary Policy Rate (MPR) by 150 basis points to 15.5 per cent from 14 per cent. The CBN also raised banks’ Cash Reserve Requirement (CRR) by 750 basis points to a minimum of 32.5 per cent, from 27.5 per cent, in order to mop up liquidity from banks’ vaults and discourage currency speculation. The apex bank, however, left the Liquidity Ratio (LR) unchanged at 30 per cent.

CBN Governor, Mr. Godwin Emefiele, had said the latest changes were part of the bank’s aggressive effort to rein in inflation, which peaked at 20.52 per cent, year-on-year, in August.

Emefiele had said the MPC was concerned that within a four-month period, inflation had accelerated aggressively by 280 basis points, from 17.7 per cent in May to 20.5 per cent. He said the decision to raise interest rate was unanimously agreed by members of the committee in order to narrow the negative real interest rate gap and hold back inflation.

Unfortunately, this comes at a time when Nigeria’s fiscal authorities are under intense pressure due to significant revenue cut. Today, Nigeria’s debt service cost presently outweighs its revenue, with the payment for petrol subsidy which runs into trillions of naira now exceeding total revenues from sales of crude oil and gas and unprecedented level of crude oil theft, which is Nigeria’s major source of foreign exchange earnings.  All these places heavy burden on the shoulders of the monetary policy authorities in the country.

However, in support of measures adopted by the CBN, the International Monetary Fund (IMF) has predicted that Nigeria’s consumer price index (CPI) which measures inflation in the country would commence deceleration before the end of the year.

The Fund also advised the CBN and other monetary policy authorities to continue to adopt traditional tools in fighting galloping inflation which has remained a concern to policy makers across the globe.

In addition, the Washington-based institution called for stronger fiscal and monetary policy collaboration to cage inflation in Nigeria.

The Divisional Chief Research Department, Daniel Leigh, IMF said: “For Nigeria, in particular, we forecast inflation at about 19 per cent this year, but then some moderation next year down to 17 per cent, and part of that does reflect the monetary policy actions by Nigeria’s Central Bank as well as the decline that we expect in oil and food prices globally.”

Also commenting on the best approach for the CBN and other central banks in Africa to fight inflation, the Chief Economist and Director Research Department IMF, Pierre-Olivier Gourinchas said: “Our advice, in general, is that central banks should first start with the traditional instruments of monetary policy and as you want to think about non-conventional instruments then you should think about what is the friction that is preventing the conventional monetary policy from working it will require a country or a central bank to deploy alternative ways of charting a course for monetary policy.”

The fund also revealed that to cushion the elevated hike in food prices globally, it has introduced what it described as a Food Shock Window, which would allow a number of countries to access emergency approved a new Food Shock Window under its emergency financing instruments.

On his part, the Director Monetary and Capital Markets Department, IMF, Tobias Adrian, stressed the need for fiscal and monetary policies to work hand in hand towards reigning in inflation as well as promoting inclusive and sustainable growth.

Adrian said: “Food prices and commodity prices have hit many sub-Saharan African countries very hard as most of the countries are importers of food.

“In particular, this comes on top of the previous crisis. The COVID-19 crisis is already in Sub-Saharan Africa and now we have this rise in commodity prices and of course, the tightening of global financial conditions that we already discussed.

“So many countries are already in debt distress or close to debt with high vulnerabilities. You know, addressing those debt issues is very high and that has triggered a tightening of monetary policy.”

To the Managing Director, IMF, Kristalina Georgieva, at a time like this, there was the urgent need to support low-income countries who have huge debt burdens in order to avert an impending food crisis.
She explained: “We also must support vulnerable emerging markets and developing countries. It is tough for everybody, but it is even tougher for countries that are now being hit by a stronger dollar, high borrowing costs, and capital outflows.

“A triple blow that is particularly heavy for countries that are under a high level of debt. So zeroing in on this for low-income countries where over 60 per cent are at or near debt distress is paramount. And we need stronger efforts to confront food insecurity.
“In all, 345 million people are acutely food insecure. What it means is that there are children and women and men are at risk of dying because of hunger.”

 Georgieva noted that the world was facing a crisis on top of a crisis. On top of this, risks to financial stability are growing and uncertainty remains exceptionally high, she added.

These repeated shocks and growth setbacks raise a bigger question, wondering if the global economy was experiencing a fundamental economic shift in the world economy —from a world of relative predictability and stability, to greater uncertainty and volatility?

“What does this mean for policymakers? It is a much more complex time, which requires steady hands at the policy levers. The price of policy missteps, the price of poor communication of policy intentions, is very high. This week, we have an opportunity to work toward minimising the risk of missteps,” she said.

“We must act now to safeguard financial stability, particularly as we see rising financial sector risks. Macro-prudential policies need to be even more vigilant and proactively address pockets of vulnerability,” she added.

Divisional Chief, Fiscal Affairs Department IMF, Paulo Medas, also stressed the need for more responsible fiscal measures to be taken by countries in the continent.

Medas pointed out that Nigeria ought to be benefitting from higher oil revenues, noting however that, “we haven’t seen an improvement as we hoped because of the large energy subsidies, but also other issues with the production of oil and other pressures on the budget.”

But the World Bank Group President, David Malpass noted that the COVID-19 pandemic pushed about 70 million people into extreme poverty in 2020.

He, however, noted that tightening of financial conditions globally, slow growth, and currency depreciations were undermining fiscal space available to support education, health, climate action, and infrastructure.

“Over 60 per cent of low-income countries are in debt distress or high risk of it. Many middle-income countries are facing increased liquidity pressures. Debt service payments are rising.

“In 2022 alone, IDA countries will pay over $44 billion to their bilateral and private sector creditors. This overwhelms the Bank and Fund’s support to them this calendar year. Improving international mechanisms to resolve unsustainable debt is an imperative.

One of the most prominent reversals is in education caused by prolonged school closures during the pandemic,” he added.

Therefore, at this time, there is need for monetary policy authorities such as the CBN to be forward-looking, vigilant and be able to always communicate their intention to the markets as clearly as they can. Also, both monetary and fiscal policy need to be in harmony to navigate the present situation. They must work hand-in-hand to bring inflation down. They must also prioritise protecting vulnerable households and businesses.