CBN’s inflation war: Wrong diagnoses, wrong treatment 

The Central Bank of Nigeria (CBN) is alone in its weird perception that Nigeria’s surging inflation is caused by excess liquidity in the system. 

The whole world is therefore against the CBN fighting inflation through relentless hiking of the nation’s monetary policy rate (MPR), the benchmark lending rate.

Last week, President Bola Ahmed Tinubu, an accomplished accountant with clear knowledge of what causes inflation, listed factors behind the surging inflation. Excess liquidity was conspicuously missing in the president’s list.

He mentioned high energy cost and the consequent high cost of hauling food items from Nigeria’s inaccessible rural farming community to the markets in urban slums, infrastructure deficit and obdurate insecurity. 

The president charted the way out of the problem but maintained a deafening silence on CBN’s persistent hiking of MPR as solution to Nigeria’s catastrophic price hikes.

Two weeks ago, the World Bank made a scathing remark on CBN’s fight against inflation. The bank warned that MPR hikes might not stem the surge in inflation. No one in the CBN monetary policy committee knows the causes of inflation better than the World Bank.

That explains why everyone believes that the CBN is swimming against the tide in the fight against inflation. The CBN is worsening a bad situation with its wrong diagnoses and consequent wrong treatment of inflation. 

In a country where the CBN itself admits that 85 percent of money in circulation is in unholy places in peoples’ homes, one wonders what the apex bank intends to achieve by its merciless grip on liquidity and astronomical cost of funds.

Manufacturers and service providers generally factor the high cost of funds into the prices of their goods and services thus causing more inflation.

CBN’s hike in MPR is partially responsible for the considerable rise in inflation in the last three months. The apex bank has raised PMR by seven percentage points since February.

It is attacking the economy with a two-edged sword. It has raised the cost of fund astronomically and tighten its grip on liquidity by raising banks cash reserve ratio (CRR) to a record 40 per cent. 

Under the current circumstance, if a bank mobilises N100 billion, it can only lend out N60 billion while the remaining N40 billion is tied down in the apex bank’s vault.

That policy has the dual evil effects of creating liquidity squeeze and making funds unacceptably expensive. Consequently, investors who could raise funds to create jobs are discouraged because in an inflationary environment worsened by CBN wrong diagnoses and treatment, no venture can generate the level of profit that can sustain the current cost of funds.

CBN has consequently succeeded in worsening Nigeria’s 33.3 per cent unemployment rate which may be crossing the 40 per cent mark at the moment.

Banks have seen the futility in CBN directives on MPR and are consequently ignoring it. At the current rate of the cost of funds and the incessant hike in MPR, it is obvious that banks can no longer create risk to deploy the funds in their vaults.

That explains why some banks’ prime lending rates are lower than CBN MPR. While the MPR stands menacingly at 26.25 per cent, some banks’ prime lending rates, the rate at which money is lent to leading corporate bodies, are as low as 24 per cent in apparent defiance of CBN’s directives.

From all indications, President Tinubu knows that the men in the CBN are chasing shadows. He has therefore set out to tackle the primary causes of inflation.

The president is convinced that Nigeria’s shameful dependence on refined petroleum products imports is at the root of the high cost of diesel which escalates the cost of evacuating food items from rural farms to urban markets.

He has therefore accelerated the funding of the rehabilitation works at the Port Harcourt Refinery to enable it come on stream and reduce the pump price of diesel and other refined products.

The president knows that rail system remains the cheapest means of evacuating goods and commuters. He is spending relentlessly to rehabilitate and expand Nigeria’s hitherto primitive rail system. That is why the Calabar-Lagos coastal road project incorporates a railway that would link the east and the west and enhance the evacuation of goods and commuters at efficient cost.

Last week, the president acquired helicopter gunships for the Nigerian Army to fight terrorists and free the fields for peasant farmers to return and produce food items.

CBN should abandon its portentous stance on liquidity control and join the fight against insecurity and infrastructure deficit which are the real causes of inflation.

The apex bank can promote mechanised farming in Nigeria by creating funds for big time farmers to acquire equipment for all season farming.

Rather than raising the cost of funds to unacceptable limits and stifling the promotion of businesses that would create jobs, CBN should climb down on the cost of funds and allow banks to create risks with the idle funds in their vaults.

After gambling fruitlessly with liquidity control and MPR hikes as measures to control inflation, the apex bank should now be convinced that the persistent surge in inflation indicates that it is tackling the wrong targets.

It should abandon its failed course and join the president in the commendable move to tackle infrastructure deficit and obdurate insecurity.

Nigeria is not producing enough food because it is using primitive method of farming. It evacuates food items at cost that prices them out of the reach of Nigeria’s 140 million people toiling below poverty line. That is partially because the rail system, the cheapest means of goods evacuation, is archaic.

Diesel is unacceptably expensive because Nigeria imports it with a weak naira. If the CBN abandons its failed inflation fight through MPR hikes and provides cheap funds for the establishment of scores of modular refineries, diesel pump price would crash and ensure the evacuation of food items at moderate fares. That is the solution to the surging inflation.