Agora Policy: Why CBN Must Tame Inflation, Review Its Monetary Policy

•Calls for strengthening of apex bank’s MPC

Emmanuel Addeh in Abuja

Agora Policy, an Abuja-based think-tank, has urged the Central Bank of Nigeria (CBN) to take cognisance of the scale of the current inflation challenge in the country with a view to getting it under control.

The Waziri Adio-led organisation which is backed by the MacArthur Foundation, argued that as long as inflation remains high, every other objective, in the quest for exchange rate stability or Nigeria’s agenda for increased cheap lending to small businesses, will be much more difficult to achieve.

The think-tank called on the CBN to remember that its primary monetary policy objective is to keep inflation in check, explaining that given that inflation is currently much higher than ideal, the direction of monetary policy has to be to tighten or reduce the growth of money supply.

It noted that this also means that interest rates will likely have to go up at least to the point where “real” interest rates are no longer negative, but maybe even higher.

However, the group stated that these actions to reduce the growth of money supply and increase interest rates are likely to be complicated by all the underhand administrative measures which were put in place to force rates down or to limit money supply growth through the back door.

“For example, the many administrative measures have meant that the monetary policy rate has recently no longer influenced interest rates either for government securities or at the banks, making the monetary policy committee effectively meaningless.

“The unwinding of the ad-hoc Cash Reserve Ratio (CRR) policy, which means money refunded to banks, will also have unintended effects if not managed. The CBN will need to unwind most of these ad-hoc measures.

“Given the misdirection by the CBN over the last few years, there may a tendency for the government to want to take closer control of monetary policy. This will likely be counterproductive as it has been demonstrated here in Nigeria and in other countries where governments tend to want to use monetary policy for other non-inflation objectives,” it added.

A better way forward, it maintained , would be to strengthen the monetary policy committee and place limits on CBN’s actions that fall beyond the scope of its regular monetary policy actions.

It explained that one option here would be to increase the number of independent members of the committee (currently only four out of 12) and/or reduce the members from the CBN and other government agencies.

 For instance, Agora Policy argued that there is no real reason why the deputy governor for corporate services, a largely administrative role, should be voting on monetary policy.

It also called for increased oversight, to ensure that the CBN actually implements the decisions of the monetary policy committee, which would also help strengthen the credibility of the apex bank.

The organisation pointed out that the direct sources of expansion in money supply witnessed over the past decade, specifically the ways and means financing of the government and the myriad of intervention funds will have to stop.

Conversely , it held that if the practice continues, it would be equivalent to removing the plug to drain liquid from the bathtub while at the same time turning on the taps.

However , it noted that not everything is within the purview of central banks, especially supply shocks, which are beyond the remit of central banks and are known also to drive up inflation.

“This in essence means that other actors, such as the governments at both the federal and state levels, can take actions to influence supply positively, which should put downward pressure on prices and therefore reduce inflation,” it added.

It stated that while the CBN has a key role to play in managing inflation, and needs to play its part, the government can also make a significant difference.

“For instance, improving security on farms and tackling logistics bottlenecks around moving food across the country will put downward pressure on food prices and reduce food inflation.

“Promoting regional African food trade, by maybe re-opening the borders and cutting tariffs on imported food will reduce food prices and reduce inflation. From a government finance perspective, improving tax collections and reducing the need for large fiscal deficits which then need to be financed will reduce inflation,” it argued.

The group stated that reality of the last few years is that there is no pain-free way out of Nigeria’s inflation quagmire. But, as with the case of the fuel subsidy and the foreign exchange restrictions, it explained that the rationale for early action is clear even if there will be costs to it.

“From a monetary policy perspective, one of the costs is the necessary higher interest rate environment. But it will be worth it if we get inflation back under control,” Agora Policy maintained.