Moghalu to CBN: Pause Further Increase in MPR, Assert Your Independence

Dike Onwuamaeze

Barely 24 hours after Central Bank of Nigeria (CBN) resolved to raise the Monetary Policy Rate (MPR) by 100 basis points from 16.5 per cent to 17.5 per cent and declared that, “lending to the government as the banker of last resort is normal,” the Institute for Governance and Economic Transformation (IGET) has released a report in which it advised the CBN to halt further increase of its MPR and reduce its ways and means funding of the federal government’s budget deficit in order to keep the inflation rate in the country stable. 

The IGET gave this advice in its latest Policy Brief publication titled, “Inflation and Poverty in Nigeria: Explainer,” that was authored by a former Deputy Governor of CBN, Prof. Kingsley Moghalu and Mr. Damian Kalu Ude, in which they tasked the CBN to put on its operational independence.

The institute further recommended that the federal government should tame its appetite for fiscal deficit and fix the supply side constraints in the country’s economy in order to improve productivity in order to tame the galloping inflation in the economy.

The IGET stated: “The CBN should resist the temptation to further increase the Monetary Policy Rate. The deployment of this monetary tightening tool should be put on pause. Prior distortions and contradictions in monetary and foreign exchange, the structural component of inflation in Nigeria, and inflation expectations, have blunted the ability of the MPR to control inflation at this time.

“Tightening the money supply remains important, but this should be pursued through other means of controlling the rate of money creation.

“The CBN has for several years abandoned its operational independence and subordinated itself to political control and partisan interests. Unless that independence is restored, the bank’s ability to maintain price stability (by resisting distortions in the money supply based on fiscal/political stimuli) will remain compromised.

“So will its ability to anchor inflation expectations through the MPR, as well as its ability to formulate and execute efficient foreign exchange policy, which also significantly contributes to inflation.”

It further stated that, “taming inflation demands urgent government intervention to fix supply side constraints in the economy. Tackling production and productivity constraints, fixing the dysfunctional forex policy, and markedly reducing liquidity injections through ways and means funding of fiscal deficit are important.

“Fiscal deficits should be reduced. While there are arguments that may support fiscal budgeting, Nigeria’s economy is not sophisticated enough to support this practice, which creates a temptation to resort to excessive borrowings, including those from the CBN that are above legally permissible limits.

“The major focus of the federal government should be improving its revenue generation by reducing taxation levels while expanding the tax net and abolish wasteful waivers to the commercial sector.”

The IGET also expressed concerns that the country’s inflation trend might not have reached its peak considering that triggers like intermittent fuel scarcity witnessed during the past four months, stubbornly high gas and energy prices, lingering currency pressures and build-up of higher Naira liquidity as the 2023 general election approaches, are yet to be addressed.

It, however, stated that the country’s inflation had been poorly managed by the CBN, which has the statutory responsibility to maintain price stability, i.e., manage inflation, under the current administration of the Federal Government of Nigeria.

Now, “everyone is paying the price. As the 2023 elections draw near, the inflation outlook is even grimmer, as prices outpace earnings, pushing more into poverty.

“Although the CBN is making efforts to curb the rising inflation by increasing interest rates, its funding of the fiscal deficit through the Ways and Means Advances has undermined the bank’s efforts,” IGET stated.

It attributed sources of inflationary pressure in Nigeria to lack of flexible foreign exchange management, trade restrictions, and conflicting monetary policy goals.  

It averred that Nigeria’s headline inflation has continued to rise, hitting a new high of 21.47 per cent in November 2022 from 21.09 per cent in October 2022, according to the National Bureau of Statistics’ report released in December 2022.

“It is unlikely that the current inflationary surge will subside quickly; economic history suggests otherwise,” the report said.

It added that the National Bureau of Statistics (NBS) recently released data about Nigeria’s inflation level and worsening poverty, citing it (inflation) as a key driver for the rising number of poor people in the country.