Analysts call on CBN to tweak strategy as inflation defies MPC
BY ONOME AMUGE
Nigeria, Africa’s largest economy, has been bedevilled by a worrisome rate of consumer price index, a measure of the inflation that has consecutively held tight to the country’s economic jugular.
The National Bureau of Statistics (NBS) in releasing its November 2022 inflation report, reported that Nigeria’s headline inflation continued its northward movement for the tenth consecutive month. It stood at 21.47 percent in November, a 0.32 percentage point surge against the 20.77 percent recorded in the previous month of October 2022, its highest level since September 2005 when the rate was recorded at 24.32 percent.
The sharp rise in the prices of goods and services was attributed to the increase in the cost of importation due to the lingering currency depreciation and general increase in the cost of production.
Food inflation, which has always been a key driver of the headline numbers, also rose to 24.13 percent from 23.72 percent recorded in October 2022. The acceleration in the month-on-month food inflation was attributed to increases in prices of bread and cereals, food products, fish, potatoes, yams and other tubers, oils and fats.
Similarly, the non-food inflation numbers picked up growth at 17.76 percent in November 2022, 48.52 basis points above 17.6 percent recorded in the previous month. Notably, the highest increases were recorded in prices of gas, liquid fuel, solid fuel, and vehicle spare parts.
To stem the inflation tide, the CBN’s Monetary Policy Committee (MPC) has resorted to a hawkish position by increasing the Monetary Policy Rate (MPR). The move was made against the backdrop of the global monetary policy trend, which has seen the American central bank (The Fed), and the Bank of England increasing Monetary Policy Rates (MPR).
The committee had in May 2022, and for the first time since September 2020, increased MPR by 150 basis points from 11.5 percent to 13 percent. In its following meeting in July, the MPC raised the MPR by 100 basis points to 14 percent. The July increase represented the second consecutive hike in the MPR within two months.
An aggressive move to fight the surging inflation saw the CBN raise the MPR to 15.5 percent in September. The benchmark interest rate was further increased by 100 basis points to 16.5 percent in November, its highest level since 2001.
The MPC, during the meeting, considered that the further tightening stance will help restore investor sentiment while curbing the rising rate of inflation.
Explaining the rationale for the further hike in the MPR, Emefiele, the CBN governor, said that the persistent rise in inflation is hurting economic growth and the driving factors are still present.
“We believe that at 21.9 percent, inflation is already hurting economic growth. If we did not see this high level of inflation in the last seven months we would have been damned optimistic that growth would have hit close to 4.0 percent.
“But because of the aggressive rate of rise in inflation, it is hurting economic growth at this level in Nigeria and that is the reason you would see that we are taking this very seriously because whether you would even try to either loosen or hold rates low what you would find is that inflation rate at this kind of levels of above from 14 to 15 percent into 21 percent, economic growth would either decelerate or at best will be very very weak, would not be at a moderated level,” he said.
Despite increasing the monetary rate for the fourth consecutive time in the year, the persistent inflation hike shows that the CBN monetary policy has failed to yield the desired result. Some analysts have suggested it is an indication that the apex bank is losing grip and running out of steam in its fight against the country’s inflation hike.
As the country awaits the CBN’s next MPC meeting in January, the analysts warn that a further increase in the monetary rate would be more of a knee jerk response which could extend rather than address the misery quotient for citizens amid an avalanche of economic distress, exacerbated by accelerating inflation.
Based on this, the CBN has been advised to review its monetary policy tools and also resort to more proactive measures towards taming the persistent inflation hike.
Reacting to the November inflation rate, Muda Yusuf, the founder and chief executive officer, Centre for the Promotion of Private Enterprise (CPPE), called on the CBN to resist the urge to further tighten the country’s monetary policy tools.
Yusuf advised the apex bank to put the deployment of monetary tightening on hold, noting that the Nigerian economy is not a credit-driven economy. This, he added, was why the outcomes of previous deployments had been inconsequential in taming inflation.
He noted that as of October, credit to the private sector as a percentage of gross domestic product (GDP) stood at 22.7 percent in Nigeria.
Comparing Nigeria’s credit percentage to that of other countries, he pointed out that the figure was 32 percent in Kenya; 96 percent in Morocco; 193 percent in Japan; 143 percent in the United Kingdom; 216 percent in the United States; and 39 percent was average for sub-Saharan Africa. This, he said, underscores the need for variability in policy response.
According to the CPPE chief, inflation had been spiking in spite of the serial monetary tightening. He added that sustained tightening penalises entrepreneurs especially the real sector and increases cost of credit with heightened prospects of a backlash on growth.
To this end, Yusuf stated that inflation restraining strategies should accordingly focus on productivity boosting supply side factors and reduction in ways and means funding of deficit.
Speaking in the same vein, Segun Kuti-George, erstwhile chairman, Nigerian Association of Small Scale Industrialists (NASSI), noted that the CBN’s hawkish monetary policy has failed to address the country’s inflationary pressures.
Kuti-George attributed the rising inflation to Nigeria’s continuous dependence on exports for production and consumption.
He, therefore, stressed the need to support the manufacturing sector more by creating a special funding window not just for big organisations but for very small businesses.
“Small and Medium Enterprises (SMEs) in Nigeria are about 90 percent, accounting for the majority of the employment.
“Windows must be opened to small businesses with the issue of collateral de-emphasised as we need to take more risks for our people.
“There is also a need to create more grants than loans to give start-ups the soft takeoff required to produce more, create more, employ more and grow the economy,” he said.
He also emphasised the need for the reorientation of Nigerians to drive the acceptability of made-in-Nigeria goods and services.
On his part, Sola Obadimu, the director-general of the Nigerian American Chamber of Commerce, said the rate hike is inevitable, given the current realities facing the economy.
“These are market forces. There’s nothing anybody can do about it. The rates will keep on increasing. Inflation will keep on increasing, naira will continue to lose value. It is inevitable. The market is just reacting to the reality of a consumer economy that is not productive in any way,” he said.
Obadimu, however, noted that the managers of Nigeria’s economy had failed to muster the proactiveness needed to cushion the impact of the economic realities, a situation he described as a tragedy given the economic consequence.
Meanwhile, the International Monetary Fund(IMF), via its mission to Nigeria has expressed its support of the CBN’s monetary rate hike.
Prior to the CBN’s last MPC meeting for the year in November, the Fund encouraged the nation’s monetary policy authority to “stand ready to further increase the MPR to send a tightening signal.”
The IMF further commended measures taken by the CBN by increasing the MPR, noting that a decisive and effective monetary policy tightening is a priority to prevent risks of ‘de-anchoring’ of inflation expectations.