- CBN using wrong approach to fight inflation – Experts
- ‘Liquidity squeeze driving undue pressure on CBN’s Standing Lending Facility’
Despite the monetary tightening measures of the Central Bank of Nigeria, which has raised the Monetary Policy Rate to an all-time high, banks’ credit to the Nigerian economy continues to assume an upward trend, hitting N105.88trn in the month of August this year.
Data from the CBN analysed by The Point showed that credit to the government accounted for 29.4 per cent of the N105.88 trillion net domestic credit in August as the government continues to rely more on local borrowing to fund its spending.
However, the high interest rate of the Central Bank of Nigeria has cut banking sector credit to the private sector by N780 billion between the months of July and August this year, based on the figures obtained from the apex bank.
Analysis of the latest money and credit data of the Central Bank of Nigeria by The Point showed that credit to the private sector in August 2024 dropped by 1.03 per cent to N74.73 trillion, from N75.51 in July 2024.
The drop in bank credit is a reflection of the monetary tightening stance, which the CBN had been implementing under its current governor, Olayemi Cardoso.
Experts have said that the rising cost of debt is starting to weigh on businesses’ willingness to expand credit further.
Unconvinced by the relative decline in inflation in July and August, the Monetary Policy Committee of the CBN had last month raised the Monetary Policy Rate, the benchmark interest rate by 50 basis points to 27.25 per cent, from 26.75 per cent in response to the continued inflationary conditions in the economy.
The apex bank retained the asymmetric corridor around the MPR at +500/-100 basis points, and also adjusted other monetary policy tools, increasing the Cash Reserve Ratio (CRR) of deposit money banks (DMBs) by 500 basis points to 50 per cent, from 45 per cent and that of Merchant Banks (MBs) by 200 basis points to 16 per cent from 14 per cent. The MPC retained the Liquidity Ratio (LR) at 30 per cent.
This is the fifth consecutive hike in interest rate, having been raised by 8.5 per cent under the current leadership of the apex bank.
The outcome of the MPC meeting had beaten analysts’ expectations that the committee would, at least, hold policy rates at current levels in response to the economic hardship faced by Nigerians.
But The Point’s analysis of the CBN money data statistics showed that while the private sector experienced a decline in credit, loans to the government surged by over N11 trillion in the month of August 2024.
This is because high interest rates are making government securities more attractive to investors.
The Registrar, Institute of Finance and Control of Nigeria, Godwin Eohoi and Nigeria’s first professor of Capital Market Studies, Uche Uwaleke, warned that the tinkering of the Monetary Policy Rate by the CBN would not moderate inflation, citing that over 60 per cent of the country’s inflation is non-monetary.
Speaking to The Point, Eohoi argued that the country was not achieving results because the CBN was focusing only on monetary causes of inflation.
He said, “The bottom line is that when you have a non-monetary inflation and you are trying to solve it with a monetary inflation approach, it will cause further problems. Nigeria’s case has largely been non-monetary inflation.
“The National Bureau of Statistics said the real cause of inflation is food inflation. So, you have increased MPR from the former CBN governor to the present governor. Why has it not solved the problem?”
Eohoi explained that the CBN was not getting it right because the country’s inflation was mostly non-monetary.
He said, “Those leading our monetary team need to upgrade their knowledge. N100 trillion last year was not the same as N100 trillion this year because of the kind of inflation. So, when you now raise the interest rate and banks tell people to pay more for loans, you end up energising inflation, and you will be forced to devalue. So, it becomes a roller-coaster because you are not separating issues and solving issues.
“CBN will need to call on authorities that are non-monetary to face the non-monetary components of inflation. If not, the CBN will be using monetary tools to fight non-monetary related inflation, which includes shortage of food, insecurity, and seasonal-induced inflation.
“You can’t rely on monetary tools such as adjusting MPR, increasing Cash Reserve Ratio, and increasing Liquidity Ratio to solve the problem.
When you do, the economy will stagnate. It means that we will not go above 3.5 per cent.”
He said the country had always used monetary tools to combat inflation that had over 60 per cent of non-monetary components.
In his comments, Uwaleke said the aggressive monetary policy hike was stifling production as many companies would refuse to borrow to expand their operations.
Just like Eohoi, the professor warned that the seeming over reliance on the MPR as a tool to tame inflation did not appear to be making any meaningful impact due to the significant non-monetary factors driving inflation in Nigeria.
Uwaleke said, “The high cost of credit is also a factor contributing to cost-push inflation. This is due in part to a very high CRR of 45 per cent representing sterilised Bank deposits with the CBN.
“This liquidity squeeze is now driving undue pressure by banks on the CBN’s Standing Lending Facility.”
He said the CBN must recognise that the challenge currently facing the Nigerian economy was not just inflation but stagflation.
