BY EMEKA EJERE
There are strong indications that the recent upward adjustment of the benchmark interest rate by the Central Bank of Nigeria (CBN) may not tame the surging inflationary pressure in the economy as expected.
The CBN had last month taken a hawkish stance by raising the Monetary Policy Rate (MPR) from 11.5 percent to 13 percent in anticipation of an aggressive accretion of inflation.
This was the first time the apex bank was raising the interest rate in two years, having pursued an expansionary monetary policy 24 months previously. According to the CBN governor, Godwin Emefiele, the MPC had to increase the monetary policy rate by 150 basis points to prevent the looming inflation.
The apex bank also retained the asymmetric corridor around the MPR at +100 /-700 basis points, Cash Reserve Ratio (CRR) at 27.4 percent, and Liquidity Ratio at 30 percent.
It had been a season of rate hike across the world economies after the U.S. Federal Reserve raised its benchmark interest rate to a target rate range of between 0.75% and 1%, the largest hike in 22 years, following a 0.25 percentage point increase in March, the first increase since December 2018.
It is possible that the apex bank followed the global trend of rate hikes, which had spread to South Africa, Ghana, and other emerging market economies that had raised interest rates.
But the Manufacturers Association of Nigeria (MAN) and other stakeholders criticised the move (hiking of the MPR), saying it would instead compound the problem of manufacturers in the face of acute foreign exchange scarcity and energy crisis.
“Commercial loans are already beyond the reach of manufacturers, especially the small and medium manufacturers. The continuous rising in food prices is worrisome”, President of the MAN, Mansur Ahmed had cautioned.
“Then, exchange rate continues to go up. Where are we going as a country? The CBN leadership will have to do something about it.”
Economic experts believe that the interest rate is inefficient in resolving inflationary concerns, particularly given Nigeria’s supply-driven inflation, import dependency, and massive informal sector.
For them, it is paramount that the apex bank pursues a more targeted approach to root out inflation, such as strengthening the value of the Naira, reducing supply bottlenecks, and pushing for financial inclusion.
The World Bank in its latest Nigeria Development Update (NDU), released last week, said inflation is likely to push an additional one million Nigerians into poverty by the end of 2022.
The report, titled ‘The continuing urgency of business unusual’, said inflation in Nigeria, already one of the highest in the world before the war in Ukraine, is expected to increase further as a result of the rise in global fuel and food prices caused by the war.
“And that, the World Bank estimates, is likely to push an additional one million Nigerians into poverty by the end of 2022, on top of the 6 million Nigerians that were already predicted to fall into poverty this year because of the rise in prices, particularly food prices,” the report read in part. The Bank also blamed CBN’s interventionist policies as contributory factor.
To reduce inflation, the bank recommended “a sequenced and coordinated mix of exchange rate, trade, monetary, and fiscal policies including the adoption of a single, market-responsive exchange rate.”
According to the National Bureau of Statistics (NBS) Consumer Price Index (CPI) and Inflation Report May 2022 released in Abuja on Wednesday, Nigeria’s inflation rate increased to 17.71 percent on a year-on-year basis in May.
The report said on a month-on-month basis, the headline inflation rate increased to 1.78 per cent in May 2022, 0.02 percent higher than the rate recorded in April 2022 at 1.76 percent.
“The percentage change in the average composite CPI for the 12 months period ending May 2022 over the average of the CPI for the previous 12 months period is 16.45 per cent. This shows a 0.95 per cent increase compared to the 15.50 per cent recorded in May 2021”, the report said.
Giving an insight on why the CBN interest rate hike would not have the desired effect on inflation. , Founder/CEO of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, said “The hike in MPR by 150 basis points to 13% by the MPC is therefore understandable. But whether this would significantly impact inflation is a different matter.
Already, bank lending has been constrained by the high CRR, the discretionary debts by the apex bank, the 65% Loan to Deposit Ratio (LDR) and liquidity ratio of 30%. The lending situation in the economy is already very tight.
According to him, the monetary policy rate’s ineffectiveness in containing inflation was related to the Nigerian economy’s structure and the presence of the informal economy.
“The Nigerian economy is not a credit-driven economy, unlike what obtains in many advanced economies which have much higher levels of financial inclusion, robust consumer credit framework and strong correlation between interest rate and aggregate demand,“ Yusuf said.
“The level of financial inclusion in the Nigerian economy is still quite low, access to credit by households and MSMEs is still very challenging, and the informal sector accounts for close to 50% of the economy.
A researcher and lecturer in the department of Finance, Covenant University, Dr. Godswill Osuma, is also in alignment with the notion that the interest rate is not an effective tool for taming inflation in an economy where prices are majorly driven by supply.
He said, “The Central Bank of Nigeria recently increased the benchmark interest rate to 13% to curb the current inflationary rate in the economy, but the question remains if this interest hike would be effective. I do not think the interest rate hike would lead to the CBN’s desired effect of reducing inflation because the prices in Nigeria are supply-driven and the disruptions in supply create artificial scarcity.”
Advising that economic policies should be tailored to the Nigerian economic environment, Osuma said, “The Nigerian economy shouldn’t treat its financial environment as those of other climes. The stability of other macroeconomic variables needs to be considered in Nigeria. How can interest rates be increased when unemployment is still on the increase?” he queried