War on inflation: MPC’s stampeded measures 

The Central Bank of Nigeria (CBN) is deeply troubled by Nigeria’s surging inflation rate. Last week the monetary policy committee (MPC) of the CBN rolled out policy measures that painted the picture of a committee tackling a modest crisis with high noon mentality.

The MPC hiked its monetary policy rate (MPR), the country’s benchmark lending rate from 18.75 to 22.75 per cent. It jerked the cash reserve ratio (CRR) from 32.5 to 42 per cent. There are fears that the MPC is behaving like an ambushed victorious army stampeded into chaotic counter-attack by a band of terrorists.

The steps taken suggest that excess liquidity is the sole cause of inflation in Nigeria and it must be tackled with the ferocity of a wounded lion.

The truth, however, is that excess liquidity is not even the major cause of inflation in Nigeria. Food inflation stands menacingly at 34.4 per cent not because there is too much money chasing few food items but because of Nigeria’s primitive method of farming which escalates production cost with inappropriate yield.

Besides, food inflation is surging on the back of the high cost of evacuating food items from Nigeria’s inaccessible rural communities to the markets in urban slums.

Nigeria has a dysfunctional rail system that puts almost all land transportation system on dilapidated roads at a time when a liter of diesel sells for N1,100.

The dilapidated roads are dotted with hundreds of illegal toll gates mounted by corrupt law enforcement agents who extort money from transporters and worsen transport cost. Corruption and infrastructure deficit cause more inflation than excess liquidity.

MPC hiked the monetary policy rate without considering the fact that CBN had been doing a one-handed fight against inflation with just monetary policy instruments without commensurate actions from the fiscal policy end by the federal government.

The steps taken by MPC in a desperate bid to reduce pressure on naira and tame inflation can be counter-productive due to their catastrophic side effects on the economy.

With MPR at 22.75 per cent, prime lending would sail perilously close to 30 per cent. Consequently, high risk borrowers like micro, small and medium enterprises can only borrow at anything from 40 per cent.

With Nigeria’s high cost of production, the new MPR will almost certainly choke SMEs out of business. And these are the segment of businesses that create more jobs than the multinationals that could access funds at prime lending rate. Even multinationals will be gasping for breath by borrowing at 30 per cent and above.

The danger from MPC’s stampeded measures is that even the banks would pay the price of the embellished cost of funds at the end of the day. 

The World Bank believes that high lending rates generate low returns on banks loans as borrowers find it very difficult to service loans with high lending rate. Consequently, bad loans would escalate with the hike in lending rate.

MPC’s draconian measures would cripple the banking system and the entire economy. With CRR at 42 per cent and liquidity ratio at 30 per cent, it means that if a bank mobilises N100 billion it would only have N25 billion to lend. 

That would amount to a merciless liquidity squeeze that would deprive the economy of funds for creating jobs and ameliorating Nigeria’s calamitous unemployment rate.

The merciless grip on liquidity would drastically reduce economic growth as funds for investment become very scarce and consequently unaffordable.

The massive liquidity squeeze and hike in the cost of lending inadvertently ignores other major causes of inflation in the economy.

We all know that the menace of herdsmen who feed their cattle on crops planted by peasant farmers contributes immensely to the low productivity and consequently the escalating cost of food inflation.

Besides, the insecurity caused by the Boko Haram insurgency in the North-east who at times slash the throats of peasant farmers has instilled fears into farmers and driven them out of the farms.

Even if the MPC takes MPR to 50 per cent and hikes CRR to 80 per cent, that measure will neither increase the supply of food items in the markets nor bring down their prices.

Instead, the few farmers who dare to borrow at exorbitant cost to invest in agric business would factor the high cost of funds into their products and make their prices even more unreachable for Nigeria’s 140 million people toiling below poverty line. The new measures will almost certainly worsen a bad inflationary situation.

Argentina, a developed economy in South America, has the world’s highest inflation. Argentina’s inflation rate stands menacingly at 211.4 per cent. 

Ironically, the Argentine central bank crashed its monetary policy rate to 15.66 per cent.

The increase in MPR was just too massive in one fell swoop. It is like the MPC would no longer meet in the next one year.

Pundits expected the MPC to ease the MPR to 20 per cent and watch how the economy would respond to that in the next three months before the committee meets again to review the situation.

The problem with the MPC’s last ditch battle with liquidity is that in an economy where 80 per cent of the cash in circulation is outside banks’ vaults, the apex bank would have succeeded in mopping up the little that was left in the banking system only for the treasury looters to use the funds in their hideouts to attack the naira in the foreign exchange market. Depreciation of naira would worsen.

That would be double tragedy. And that is almost certainly what is going to happen. The CBN itself has blamed the cash squeeze that has persisted for almost one year on hoarding of cash by some Nigerians.

The decision to mop up what is left in circulation through merciless liquidity squeeze would worsen inflation as the naira’s disorderly depreciation escalates with the use of the massive funds outside the banking system to chase forex.