Nigeria’s Economy and Limits of Monetary Policy
In this piece, James Emejo aggregates analysts’ perspectives following the recent moderation in Central Bank of Nigeria’s monetary tightening
In apparent efforts to tackle inflationary pressures and achieve price stability, the Central Bank of Nigeria (CBN) under Mr. Olayemi Cardoso, has raised the Monetary Policy Rate (MPR), the benchmark interest rate, on four consecutive occasions since February.
At its maiden meeting of the Monetary Policy Committee (MPC) in February, the central bank raised MPR by an unprecedented 400 basis points (BSPs) to 22.75 per cent from 18.75 per cent.
In March, CBN also hiked by 200 basis points to 24.75 per cent from 22.75 per cent.
Also at its meeting in May, the MPC opted for a third consecutive interest rate hike, of 150 bps, to a record high of 26.25 per cent.
Furthermore, at its recent meeting in July, the committee resolved to raise the benchmark interest rate by 50 basis points to 26.75 per cent from 26.25 per cent.
The MPR is the rate at which commercial banks borrow from the apex bank and often determines the cost of funds in the economy.
All along, given the current high cost of credit from traditional banks and the attendant hardship it contributes to the economy, analysts have continued to urge the central bank to reconsider its contractionary policy stance in order to support growth.
But the MPC, chaired by Cardoso, had made it abundantly clear that it was determined to pursue its price stability mandate even if it is at the expense of growth.
Why will CBN jettison growth amid economic difficulties?
Oftentimes, central banks often choose to raise MPR to tackle inflation, even if it comes at the cost of slower economic growth.
This is partly because high inflation erodes the purchasing power of money, leading to higher costs of living and uncertainty in the economy. Thus, by raising the MPR, the CBN attempts to make borrowing more expensive, thus reducing consumer spending and business investments – effectively cooling down demand and helping to bring inflation under control.
Another reason is to achieve price stability. The CBN believes that if inflation is high or rising, it is better to curtail it as sustained inflationary concerns could lead to long-term economic instability.
The CBN bank had also adopted aggressively measure to curtail rising prices to maintain its credibility particularly to stabilise financial markets and attract investment, even if it means short-term pain for the economy.
According to Cardoso, the risks of allowing inflation to rise unchecked—such as economic instability, loss of purchasing power, and potential hyperinflation—are often viewed as greater than the costs associated with slower economic growth.
CBN slows down on tightening
At its last MPC meeting the central bank, further raised the by 50 basis points to 26.75 per cent from 26.25 per cent, the bare minimum increase of all four.
Cardoso said the committee was mindful of the effect of rising prices on households and businesses and expressed its resolve to take necessary measures to bring inflation under control.
The MPC, however, re-emphasised its commitment to CBN’s price stability mandate, expressing optimism that despite the June 2024 uptick in headline inflation to 34.19 per cent, prices are expected to moderate in the near-term.
However, the moderation in MPR hike came amid elevated food prices.
Notwithstanding, the MPC further doubled down on its commitment to stay on course with its tightening cycle in view of the urgent need to address inflationary pressures to consolidate on the gains achieved so far.
The CBN governor particularly hinged the bank’s optimism on monetary policy gaining further traction, in addition to recent measures by the fiscal authority to address food inflation.
Cardoso specifically noted the persistence of food inflation, which continued to undermine price stability, adding that while monetary policy had been moderating aggregate demand, rising food and energy costs continue to exert upward pressure on price development.
He pointed out that the prevailing insecurity in food producing areas and high cost of transportation of farm produce were also contributing to headline inflation.
He said the committee was therefore, not oblivious to the urgent benefit of addressing these challenges as it will offer a sustainable solution to the persistent pressure on food prices, highlighting the increasing activities of middlemen who often finance smallholder farmers, aggregate, hoard and move farm produce across the border to neighbouring countries.
Implications of less aggressive hike in MPR mean
Many analysists have, however, considered the moderate increase in interest as a sign of positive development for the economy. Others also pointed to the fact that the apex bank may have come to terms that increasing MPR may not be the only viable option to tame inflation.
If any thing, policy rate remains crucial in an economy for control of Inflation as raising the rate.makes borrowing becomes more expensive, which can reduce consumer spending and business investment, slowing down economic activity and, in turn, reducing inflation.On other hand, lowering the rate could also stimulate spending and investment, which can boost inflation when it is too low.
The monetary policy rate can influence the exchange rate of a country’s currency because higher interest rates tend to attract foreign investment, leading to a stronger currency, while lower rates can lead to a weaker currency, a situation that impacts the balance of trade and capital flows.
MPR policy can also influence job creation as lower rates can lead to increased business investment and hiring, reducing unemployment, while higher rates can have the opposite effect.
Additionally, changes in the monetary policy rate send signals to financial markets and the broader economy about the CBN’s views on the economy.
Chief Executive, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf told THISDAY that the marginal increase in MPR “marked a softening of the MPC’s tightening stance”.
Economy on the right path?
Recently, President Bola Tinubu admitted that the economy was bleeding at the time he took over government, adding, however, that through hard work, his administration had now stopped the bleeding.
The president added said that the past 12 months had been challenging and at the same time fulfilling, adding that the worst was over.
Cardoso, during the MPC meeting also explained that the various reform initiatives in the FX segment had been positive.
Backing his claims with evidence, he said exchange rate had converged, limiting the opportunities for arbitrage, adding that FX inflows had increased from 37.93 per cent between January and May 2024 to $38.8 billion while net inflows grew by 73.4 per cent May 2024 compared to May 2023.
Cardoso also stated that Diaspora remittances had currently gone up to $2.34 billion in compared to $1.58 billion in the corresponding period last year.
He said capital importation also increased to $5.92 billion between January and June compared to $1.77 billion same period last year.
He said: “So, that is all very positive for foreign exchange management. We have also seen that on the capital markets policies, the capital market has been responding positively and of course, the banking sector.
“We have been very aggressive in giving guidance to the banks with respect to how we want them to position themselves for the future of the $1 trillion economy.
“Inflation targeting is something that is an ongoing process, which we will be giving more and more guidance as we go along.”
The CBN governor insisted that the aim of monetary policy decisions were meant to impact the man on the street, pointing out that the current economy hardship were a result of policy choices by past administrations.
He said: “It is important to cast our minds back and ask ourselves how did we get to where we are today. Let us not forget that over a period of time, we had an economy and have failed to diversify that economy. We would argue that the Nigerian economy has basically been a monolithic one, dependent on one source of revenue.
“Now, of course, a monolithic economy has its own risks. And part of those risks, of course, is that if anything happens to your dependency, then the whole system gets shaken.
“And I guess in many respects, that is part of what we’re going through. Part of it is, not all, certainly part of it because let’s not forget that there are global headwinds as well.
“And that going forward, we must ensure that we are able to craft policies that are sustainable and will bring a sustainable method of development for our people.”
Cardoso said the CBN was currently engaging with the Organised Private Sector (OPS) which had been raising concerns over the continued monetary tightening regime of the bank.
Justifies inflation targeting
Cardoso also said it was in the overall interest of Nigerians and the economy to subdue inflation.
He said: “Inflation really and truly is having a major impact on our economy. Purchasing power is getting eroded. “People are being pushed into different categories of poverty, and it is in their own interest that we are able to take the scourge of inflation.
“If not, the ramifications will also be for them. It’s not on the average man alone. We understand the need for growth and we also understand that it is relatively challenging when you have high-interest rates.
“We also understand that, quite frankly, my belief is that it is so fundamental to the long-term future and stability of our economy that inflation should be brought under control that in the short term these are pains which ultimately will be able to help our economy and help the manufacturing businesses as well.”
On CBN’s recent policy on dormant accounts, Cardoso said the move was in the interest of account holders, adding that the apex bank should be commended for taking the steps to safeguard them from fraudsters.
He said: “Over the years, in my experience what I found personally, is that if you leave the accounts dormant in banks…In fact, most times, they are more susceptible to fraudsters copying your identity and trying to game the system to grab all of your money.
“So, that is a problem that I think most DMBs face and I’m sure if you’ve been on the receiving end, I have been, then you know that anything that can protect you in the process from these kinds of predators will be welcomed.”
He said the policy directive was meant to ensure that all those monies come to the central bank for safekeeping. You don’t lose your money and it is at zero cost to the beneficiaries.
“All that will happen is that the central bank will manage the monies within our position and when the rightful owner surfaces, the money is returned, plus whatever income is accrued to them.
“I think this should be a welcome development, even from the naysayers because at a time like this, we recognise the fact that everybody needs every single penny that belongs to them, to accrue to them and not have a situation where you’re putting money in a particular place and essentially end up losing it. Of course, it will create liquidity within the system as well.”
Analysts’ perspectives
In separate interviews with THISDAY, analysts expressed their optimism that in deed, the current challenging times may be fading away, despite a high inflationary environment and expensive credit regime.
Director, Institute of Capital Market Studies, Nasarawa State University Keffi/ President Capital Market Academics of Nigeria, Prof. Uche Uwaleke, concurred that there appeared to be light at the end of the tunnel.
He said: “I think so. The worst is over even though the CBN tightening stance has not changed in view of the adjustment in the asymmetric corridor.
“With the harvest season and the implementation of the import duty waiver for basic food items, I see food inflation, which is the pressure point, moderating in the coming months.”
Also, Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr. Chijioke Ekechukwu, said: “We have clamoured for a reduction in tightening for a while.
“Increasing the MPR by 50 basis point as against the 150 basis points of the previous quarter is an indication that tightening may not continue to be the only measure for reduction of inflation.”
On his part, however, Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, said getting the economy out of the woods may still be a long haul.
He said: “The yardstick to measure progress is when inflation is easing and that is not the case presently. Food inflation is on the rise and due to hike in interest rates businesses are paying a higher price on their facilities with bank which has reduced their bottom line.
“The Naira continues to lose strength despite serious intervention by the CBN. On the fiscal side, the measure taken by government has not started yielding results so the worst is not over for the economy instead it needs a rejig.”
