Rising from its 149th meeting of its Monetary Policy Committee, the Central Bank of Nigeria (CBN) announced a moderate rate hike to 18.75 per cent from 18.50 per cent; indicating that it would not relent in its attempt to tame inflation. However, analysts argue that the country’s structural deficit would make it difficult for the apex bank to see the full benefits of the hike; BENJAMIN UMUTEME writes.
Background
Established in 1958 by the CBN Act, the Central Bank of Nigeria is the country’s apex monetary authority. It, however, commenced operations on July 1, 1959.
According to the CBN Act of 2007, the bank is charged with the overall control and administration of the monetary and financial sector policies of the federal government. And thus, the Bank has been mandated to ensure monetary and price stability; issue legal tender currency in Nigeria; maintain external reserves to safeguard the international value of the legal tender currency; promote a sound financial system in Nigeria; and act as Banker and provide economic and financial advice to the Federal Government.
Consequently, the bank is charged with the responsibility of administering the Banks and Other Financial Institutions Act (BOFIA), 2020, with the sole aim of ensuring high standards of banking practice and financial stability through its surveillance activities, as well as the promotion of an efficient payment system.
In addition to its core functions, CBN has over the years performed some major developmental functions, focused on all the key sectors of the Nigerian economy (financial, agricultural and industrial sectors). Overall, these mandates are carried out by the Bank through its various departments.
Therefore, it is no surprise that in order to tame Nigeria’s rising inflation, the regulator like others globally continues to hike interest rates.
Though opinions have been divided about the rightness or otherwise of this policy direction, the Bank has to fulfill its primary mandate.
Data
According to data from the CBN, broad money supply (M3) in June 2023 grew by 24.35 per cent (year-to-date), compared with 6.70 per cent in May, driven largely by the increase in both Net Foreign Assets (NFA) and Net Domestic Assets (NDA). Money market rates reflected the level of liquidity in the banking system. Consequently, the monthly weighted average Open Buyback (OBB) and Interbank Call rates decreased to .12 and 11.61 per cent in June 2023, from 12.60 and 12.31 per cent in May, respectively.
The implication is that the apex bank cannot afford to fold its hands and watch with money supply (M2) increasing to N64.3 trillion in June from N55.6 trillion in May.
Moderate hike
Addressing journalists, the acting governor of the CBN,Folashodun A. Shonubi, noted that the continued uptick in inflationary pressures, as headline inflation (year-on-year) rose by 0.38 percentage point to 22.79 per cent in June 2023 from 22.41 per cent in the previous month was driven by the moderate increases to both the food and core components. Therefore, in order to not only fulfill its mandate but also protect livelihood, the Bank was left with no option but to moderately hike the rates.
While there was an option to hold rates, the acting governor noted that other considerations influenced the MPC’s final decision.
“The option to continue to hike the policy rate, albeit moderately, also presents a strong alternative. This is premised on the expected liquidity injections into the economy, from the recent policy developments and the likely impact on inflation.
“The Committee remained cautious in arriving at a policy decision as Members noted the need to continue to support investment which will ultimately lead to the recovery of output growth. The balance of these arguments thus leaned in favour of a moderate rate hike, to sustain efforts at anchoring inflation expectation, narrow the negative real interest rate gap, and improve investor confidence,” Shonubi said.
The MPC also adjusted the asymmetric corridor to +100/-300 basis points around the MPR from the previous corridor of +100/-700 basis points around the MPR; retained the CRR at 32.5 per cent; and also retained the Liquidity Ratio at 30 per cent.
Experts’ reactions
Aligning with the MPC decision, an economist and co-managing partner and CEO of Comercio Partners Asset Management, Tosin Osunkoya, said the apex bank’s decision to hike interest rates demonstrated its commitment to combating inflation and preserving price stability.
Osunkoya said the MPC’s decision to raise the benchmark interest rate (MPR) by 25 basis points to 18.75 per cent demonstrates the Committee’s concern about the consequences of cost-push inflation.
“However, by hiking interest rates, the CBN hopes to alleviate inflationary pressures caused by growing manufacturing costs, which have been contributing to the persistent surge in headline inflation.
“The narrowing of the asymmetric corridor around the MPR to +100/-300 basis points is a significant step towards giving more stability to the broader interest rate framework and preventing excessive interest rate volatility,” he said.
In his view, a financial analyst, Gabriel Idakolo, said CBN’s decision must have been reached due to the impact of the new government policies on subsidy removal and exchange rates which has increased inflation as well as food inflation and resulted in higher cost of goods and services.
He said, “The MPR decision would be on the premise that the measure will tame inflation and the resultant effects of the new government policies would cause inflation to gradually decrease in the coming months.”
While for Uche Uwaleke, the decision by the MPC to increase interest rate by 25 basis points shows that CBN’s fight against inflation is a tough task.
Uwaleke, is a professor of Finance and the Capital Market, said: “The tepid increase by just 25 basis points to 18.75% is an acknowledgement of the fact that there’s very little the CBN can do to tame supply side- induced inflation via the policy rate.
“On the other hand, a decision to maintain policy parameters could be misconstrued as insensitivity on the part of the CBN with respect to rising inflation.
“So, it does seem that the MPC decision is an attempt to thread a middle-of-the road path.”
Structural challenges
Financial experts and industry watchers have continued to argue that the country’s inflation is propelled by its massive structural deficit. With epileptic power supply causing manufacturers to provide their own sources of power supply, an almost non-existent railway and road that make transportation a nightmare for travelers, not forgetting the insecurity, all these they say continues to push up the prices of goods and services.
The chairman, Foundation for Economic Research and Training, Prof. Akpan Ekpo, noted that the country’s inflation was mainly cost-push driven; hence, raising the MPR was not the solution.
“Fix security and implement structural policies to curtail inflation. If security is fixed, farmers will return to farming impacting on food inflation.
“The inflation for now is not demand driven; the increases in petroleum motor spirit, utilities, among others, are driving up prices.
“Furthermore, research has shown that the MPR has no positive impact on the cost of funds. Interest rates are still quite high and will remain so for a long-time.
“The banking sector is not competitive enough to drive down interest rates. We have an oligopolistic banking structure,” Ekpo said.
In his view, the chief executive officer at Cowry Asset Management Ltd., Mr. Johnson Chukwu, stressed that MPR had ceased to be the anchor rate for lending in the country.
He said, “So, there is actually a disconnect between the monetary policy rate and the lending rate. You will realise that if you look at the MPR, until yesterday, it was 18.05 per cent, with an increase of 25 per cent.
“But then Treasury bills, 364 day bills, closed last two week at 5.94 per cent and then 81 day bills closed at about 3.5 per cent, so these are not representative of the inflation rate nor the monetary policy rate.
“So, these factors make it difficult for money market rate and lending rate to be anchored on monetary policy rate.”
Adopting new approaches
For political economist Adefolarin Olamilekan, the CBN needs to look at a new approach to tackling inflation as the current strategy seems not to be as effective as it would have liked.
According to him, the apex bank needs to look at the peculiarity of the monetary environment and investment ecosystem.
“We believe it’s not right to just increase the rate without observing how it impacts the business environment negatively,” he said.
For Adefolarin, there is a need for a strategic mix of fiscal, monetary and trade policies.
“What we expect from the CBN is to have maintained the status quo of the previous 18.50% and see how to ensure a boost in credit facilities by DMBs to Nigerians.
“Another is for the apex bank to refocus its monetary tool in favour of the trade policy of the government. This we believed would allow for proper synergy, particular availability of forex and encouraging exports.
“Lastly, we expect the reserved bank of the nation to end arbitrary charges and discrepancy in the interest rate regime. A look at all the financial institutions in the country shows a varied rate subject to financial institutions mode of operations and profit target.
“Although we acknowledged the fact that hiking rates is a boost to savings, FDI and stock market, regrettably, this could be an avenue to kill local businesses, chiefly our MSMEs but formal and informal.
Idakolo, who is the managing director of SD&D Management Limited, said the policy stance by the CBN is premised upon the long run effect of fiscal authority’s reforms.
“The revenue of the Federal government in the past month has increased by about 150% due to the subsidy removal policy and there is increased investor interest in the economy due to the exchange rate policy.
“The CBN is looking at these developments and using it to sharpen their policies. If the government policies are effective in the long run it would reduce inflation and increase productivity which will definitely cause inflationary pressures to reduce.
“And like the acting CBN governor did rightly observe, there is a need for the monetary and fiscal authorities to sustain its collaboration towards addressing the inflationary pressure and incentivise domestic investment to reduce unemployment and boost output growth.
“It enjoined the federal government to continue to explore policies to improve investor confidence in the Nigerian economy and pave the way for foreign and domestic investments. Members emphasised the need to attract investments, particularly to auto manufacturing, aviation, and rail industries to boost non-oil revenues.”
