The World Bank has finally joined the Babel of voices condemning the Central Bank of Nigeria (CBN) one-handed fight against inflation through relentless and ineffectual manipulation of its monetary policy rate (MPR), the nation’s benchmark lending rate.
The World Bank warned in its recent report about the futility of fighting inflation with MPR hikes as Nigeria’s surging inflation is fueled by structural defects in the economy rather than excess liquidity identified by CBN’s jaded diagnosis.
In the last 13 months CBN hiked MPR seven times raising it from 11.5 to 18.5 per cent. The result is a catastrophic credit deficit in the banking system that inflicted an excruciating crunch in lending to the private sector.
During that period the apex bank rather inauspiciously admitted that lending to the private sector plunged by a whooping N800 billion to a paltry N600 billion. Lending to the private sector stood at N1.4 trillion before CBN’s merciless grip on liquidity through senseless MPR hikes.
CBN beats its chest in self acclaim and argued that its cruel grip on liquidity through thoughtless manipulation of the benchmark lending rate has stopped inflation from rising to 30 per cent.
There is absolutely no empirical evidence to support that claim. As the World Bank finally admitted and as it has been canvassed repeatedly in this column, Nigeria’s surging inflation is caused by structural defects in the economy rather than excess liquidity. Infrastructure deficit, primitive farming method and corruption fuel more inflation than excess liquidity.
CBN’s fight against inflation with the wrong policy instrument is directly responsible for Nigeria’s escalating unemployment rate that has made the country the world headquarters of poverty.
The position of the World Bank on CBN’s failed battle against inflation points to the fact that the apex bank had inadvertently been fueling inflation rather than reducing it.
Lending rate hike is a double-edged sword in the fight against inflation. While it discourages private sector borrowing and in the process stems liquidity and gives the naira a measure of breathing space in the foreign exchange market, it inadvertently fuels inflation as manufacturers and service providers pass the higher cost of funds to consumers through higher price tags.
After the CBN announced the last MPR hike in May 2023, Nigerian manufacturers responded with warnings that the MPR hike would trigger massive price hikes to compensate for the higher cost of funds.
Perhaps the most deadly effect of MPR hike as an instrument in the fight against inflation is its effect on unemployment. The CBN inadvertently admitted in its explanation for the last MPR hike that it has deprived the private sector of the sum of N800 billion in credits that could be used to create jobs.
Investments of N800 billion in the economy can create a million direct jobs that would push millions out of poverty. Now that the World Bank has joined the Babel of voices to convince the CBN that it was fighting inflation with the wrong policy instrument, common sense suggests that the new leadership of the apex bank should order a climb down on MPR to ease the merciless grip on credit.
Turkey had inflation rate surging to 85 per cent in the third quarter of 2022. However, the tacticians in the country’s anti-inflation war room maintained their calm and kept their benchmark lending rate at 11 per cent because they were convinced that liquidity was not at the root of the surging inflation.
Even at a time the gross incompetence and duplicity of Godwin Emefiele, CBN’s suspended governor, inauspiciously led to the catastrophic failure of the laudable decision to redesign the naira in a bid to mop up looted funds from the homes of corrupt politicians, CBN ignored the devastating effect of the cash crunch it had inadvertently created and still ordered fresh MPR hikes that worsened a bad situation. It was the height of incompetence and insensitivity to the suffering in the land.
CBN has to learn a lesson from Turkey if it must overcome the tendency to panic into wrong diagnoses which have worsened Nigeria’s economic problems in the last eight years.
CBN had surreptitiously tightened credit to calamitous proportions at a time the economy needed massive credit expansion.
The consequence of the use of the ineffectual policy instrument has been intolerable unemployment rate as senseless MPR hikes deprive the private sector of funds that could be used to create jobs and reduce poverty.
In an economy where 85 per cent of the money in circulation is in private homes, liquidity squeeze, which MPR hike implicitly elicits, should be the last policy instrument in the fight against inflation.
When liquidity is tightened in an economy where only 15 per cent of the cash in circulation is in bank vaults, it inflicts excruciating pains on the banking system while corrupt politicians use the looted funds in their homes to frustrate what was to be achieved with the liquidity squeeze.
With Emefiele out of the scene, CBN anti-inflation tacticians should collaborate with the federal government and fashion out fresh strategies that would address the structural defects in the economy. The defects are freely fueling inflation without anyone challenging them.
The federal government must not leave the fight against inflation to the CBN alone. What is needed now is excellent combination of monetary and fiscal policies in the fight against inflation. That is the only way to address the structural defects fueling inflation.
Nigeria needs an effective rail system that would reduce the cost of evacuating food items from the remotest part of northern Nigeria to the markets in the south.
That is not the job of the anti-inflation tacticians in the CBN. The federal government must tame the extortionist market unionists imposing levies on food items.
Above all, Nigeria has lost the war against corruption. Corruption has more inflationary inclination than excess liquidity. The federal government must return to the trenches and do a hard fine fight against corruption. Besides, Nigeria’s primitive farming method must be mechanised.