The Central Bank of Nigeria will hold its 294th meeting of the Monetary Policy Committee on Monday and Tuesday. The MPC is the highest policy-making committee of the bank with the mandate to review economic and financial conditions in the economy, determine appropriate stance of policy in the short to medium term and review regularly, the CBN monetary policy framework and adopt changes when necessary. The two-day event is scheduled to be held on Monday, March 25, and Tuesday March 26, 2024, at the bank’s headquarters in Abuja. As the CBN holds its second monetary policy meeting in March, debate is generating among financial pundits, some of which believe that the tightening measure will continue. FESTUS OKOROMADU, in this report, x-rays the various perspectives of the aggressive moves of the Olayemi Cardoso-led MPC and the impact on the economy vis-à-vis the wellbeing of ordinary Nigerians.
Nigeria’s economic performance continues to be a source of concern for many despite promises from the government and its agencies. Though the nation’s challenges encompass both social and economic aspects, citizens seem to be more worried about the economy.
The Governor of the Central Bank of Nigeria, Olayemi Cardoso, recently attested to such concerns when he said, “I understand that many of you have concerns about the current state of our economy.”
The apex bank governor who stated this while addressing the 58th annual Bankers’ Dinner in Lagos, last November, then went ahead to give assurances of the government’s ability and commitment to surmount the challenges saying, “I want to assure you that while it is indeed a formidable challenge, it is not insurmountable. With the right policy measures, we can overcome these obstacles and pave the way for progress and prosperity. I am confident and optimistic that by taking appropriate corrective actions and strategic steps, we can restore macroeconomic stability and address fundamental flaws.”
But months after these pronouncements many ordinary Nigerians seem to be losing hope in view of the economic realities they face daily.
Inflation in February according to figures from the National Bureau of Statistics stood at 31.7 percent while food inflation being the major contributor to the Consumer Price Index is close to 40 percent. Energy cost is another big driver of inflation even as the challenges of insecurity continue to aggravate economic woes, especially in the aspect of food production and supply.
An economist and lecturer at the University of Abuja, Olanrewaju Aladeitan, who spoke with The Point on the state of management of the economy, alleged that policies emanating from both the fiscal and monetary arms are affecting the ordinary citizens negatively.
“Interestingly, the unprecedented interest rate hike of 400bps has solicited positive reactions from international stakeholders; this is evidenced by the surge in participation of foreign investors in Nigeria’s government securities following the interest rate hike”
According to him, “The removal of fuel subsidies without a well-thought-out plan to alleviate the consequences coupled with the devaluation of the Naira without adequate provision for the supply of foreign exchange has weakened the purchasing power of Nigerians.”
“The first Monetary Policy Committee meeting under Cardoso and his newly inaugurated MPC team opted to hike the monetary policy rate by 400 basis points (bps) to 22.75 percent per year; this came as a surprise to the market.
“The rise is not only a supersized hike, but also the highest single MPR hike since its adoption in 2000.
“The implication is that the cost of funds will be higher, and those in manufacturing are feeling the heat as some are folding up because of numerous factors including high cost of production and declining sales due to pressure on the disposable income of the citizens. So, what do they expect producers to do? With the hike in the cost of funds, it becomes even more difficult for new people to enter into the productive sector, resulting in unemployment,” he said.
Elaborating further, he said, “The rate-setting meeting held on February 27, 2024, was the first MPC meeting since July 2023. So far, the MPC has raised the policy rate by 1,125 basis points since May 2022. This is the fastest and most aggressive interest rate hike in the past two and a half decades.”
Another economist and chief executive of Omegaplus Limited, Nwachuku Eze who described the MPC’s raise of the MPR as a jumbo hike noted that the consideration for rate rise was to rein in the three-decade high inflation by reducing excessive money growth and stabilizing the exchange rate.
He, however, insisted that with the money supply rising by 76 percent to N93.5 trillion in January from N53.3 trillion a year ago and the exchange rate also depreciating by 77 percent (YoY) in February, the government has shown an inability to manage resources appropriately.
Eze insisted that the tightening stance of the CBN is an “off-label-use” approach, “which is a case of using omeprazole (an ulcer drug) for the treatment of cancer instead of such drugs as paclitaxel.”
The overarching argument is that Nigeria’s inflation is a supply-side phenomenon rather than a demand-side problem. Thus, a fiscal rather than monetary arsenal is what is required. However, there is no gainsaying that both sides of the argumentative divide hold merit in winning the inflation war.
Gains of CBN’s policies
Meanwhile, the Naira’s response to the decision of the last MPC meeting shows some signs of hope. The Naira has firmed up in recent times, appreciating by 9.5 percent as of Wednesday last week to N1475/$ from N1615/$ on the day of the meeting (February 27).
Speaking to the strengthening of the Naira in recent times, financial analysts at Financial Derivatives Limited said the Naira was bookended by the scarcity of the currency which has moderated the demand for the dollar.
FDL listed other factors that supported the firming of Naira including increased supply of forex exchange, and sanitization of the FX market.
Another gain of the tightening stance is the average banks’ daily opening position, an indicator of system liquidity, which declined substantially to N1 trillion (short) from N2.29 trillion (long). This was also buoyed by the aggressive mopping up of liquidity through OMO sales in excess of N1 trillion, with one-year OMO bills selling at an interest rate of 21 percent per annum.
According to the CBN, foreign demand for short-term government risk-free securities also jumped to nearly 80 percent, leading to an astronomical increase in foreign portfolio investment (FPI) to $1.15 billion in one month, from a monthly average of $96 million in 2023.
Talking about the downside, FDI noted that inflation rose fiercely to 31.7 percent (YoY) in February, with month-on-month inflation spiking to 3.12 percent (which represents an annualized inflation rate of 44.6 percent).
“This is expected since monetary policy measures do not work in retrospect. Also, we expect a time lag of 2–6 months before the effects of the current monetary tightening begin to manifest; the month-on-month inflation is expected to decline to about 2.01 percent (annualized: 27.0 percent) in March,” the analysts at FDL said.
FDL explained, “The exchange rate is a key driver of inflation. The exchange rate pass-through in Nigeria is estimated at about 82 percent. Thus, a depreciation of the Naira raises import costs, leading to higher domestic prices for imported products and potentially driving overall inflation. Industries reliant on imported raw materials may face higher production costs, further contributing to inflation.
“Conversely, a stronger currency can lower import costs and reduce inflationary pressures. However, exchange rate volatility can introduce uncertainty, impacting consumer confidence and economic stability. This could also trigger a speculative attack on the Naira, as evidenced in January and the first three weeks of February.”
Still, on the impact of the hike of MPR, an economist and lecturer at the Nasarawa State University, Adamu Usman, said Nigeria’s runaway inflation is associated with structural and supply-side culprits. He, however, cautioned that arguing that monetary factors are not potent in taming inflation is like saying that food poisoning cannot be caused by bacteria.
“Available empirical evidence shows that countries with high rates of money growth also have high rates of inflation. In other words, if Nigeria is not a maverick, then it is impossible for Nigeria to escape runaway inflation at the current level of money supply growth. Nigeria printed nearly N30 trillion in Ways and Means Advances. Unless you mop up this excess liquidity, winning the war against inflation will be a pipe dream.
“However, while raising interest rates could tackle demand-side inflation, including exchange rate volatility, Nigeria’s structural issues call for a fiscal response,” Usman said.
According to him, rather than focusing on the instrumentality of monetary policy, the government needs to address productivity gaps, insecurity, supply chain disruptions, and energy costs, which require targeted fiscal policies.
He stated, “Investing in infrastructure, enhancing security, and improving supply chains can boost productivity, reduce costs, and stabilize prices.”
He added that a fiscal approach complements monetary measures, focusing on supply-side factors to enhance economic efficiency and competitiveness, ultimately fostering sustainable growth and addressing the root causes of inflation.
Managing ineffective monetary policy
Addressing the efficiency or otherwise of monetary policy tools in managing the economy, researchers at FDL in their weekly publication stated that the unrelentingly skyrocketing inflation in spite of the CBN’s monetary tightening stance has sparked a fledgling debate on the effectiveness of monetary policy as a tool for taming inflation.
Adding that, it also brings into question the monetarist view that inflation is “everywhere and at all times a monetary phenomenon.”
But quoting Raghuram Rajan, the former Governor of the Reserve Bank of India, who said, “Monetary policy is like juggling six balls… it is not ‘interest rate up, interest rate down’, they stated that, “There is the exchange rate, there are short-term yields, and there is credit growth.”
The financial experts at FDL argued that “The effectiveness of monetary policy could be impaired by what Milton Friedman called “long and variable lag” or structural impediments that may short circuit the transmission of monetary policy.
“Monetary policy lag, which refers to the time delay associated with the identification of an economic problem, the implementation of monetary policy, and its impact on the economy, could take any of the following forms: implementation, transmission, and impact lag. Implementation lag, also known as inside lag, refers to the time taken to implement a monetary policy decision, such as changing interest rates or adjusting the money supply.
“Although inflationary pressure began in 2021, the CBN did not act until May 2022. Transmission lag, which refers to the time taken for the monetary policy decision to affect the broader economy, can vary depending on the structure of the financial system, interest rate sensitivity, and market conditions. Also, the severity of the shock to price development and the economy’s legacy constraints can affect the impact lag of monetary policy.
“Effective implementation of monetary policy can also be impaired if the transmission mechanism is short-circuited. Nigeria’s monetary condition has remained loose since 2021, and this has not changed until recently,” the experts said.
“The IMF’s forecast of stronger GDP growth in 2024 was attributed to improving domestic oil production as well as a better harvest in the second half of the year”
Comparing the Nigerian situation to other countries, FDL researchers stated that, in January 2024, Nigeria’s money supply grew by 76 percent (YoY) compared to the annual growth rates decline of -1 percent, -0.99 percent, -0.024 percent, and 0.27 percent in the US, UK, EU, and South Africa, respectively. Submitting that, “Excessive domestic liquidity complicates monetary tightening objectives by short-circuiting the transmission mechanism of monetary policy.”
Global operators’ perspective
Interestingly, the unprecedented interest rate hike of 400bps has solicited positive reactions from international stakeholders; this is evidenced by the surge in participation of foreign investors in Nigeria’s government securities following the interest rate hike.
The IMF, for instance, stated that the aggressive monetary tightening by the CBN via the monetary policy committee is a step in the right direction, and has forecast Nigeria’s GDP to grow by 3.2 percent in 2024, up from 2.7 percent in 2023.
The IMF’s forecast of stronger GDP growth in 2024 was attributed to improving domestic oil production as well as a better harvest in the second half of the year.
However, credit rating agency Fitch Ratings has noted that further sizable monetary tightening would be required to ensure positive real interest rates and transparency in the forex market.
This is to bolster positive investor sentiment and keep foreign capital inflows strong. On that note, the MPC is expected to raise interest rates by at least 100bps in its next meeting on March 25–26, 2024.
