- CBN’s tightening policy fails to stem inflation tide
- 26m Nigerians to further go down poverty threshold – Experts
- Analysts predict rise in headline inflation to 32.40% in September
- Highlight challenges facing CBN
Nigeria’s annual inflation has remained elevated despite varying reforms by the Central Bank of Nigeria targeted at easing the 28-year-high consumer price index.
As a result, the country’s poverty risk heightens because the CBN’s tightening policy has failed to stem inflation tide.
According to analysts interviewed by The Point, inflation remains a herculean task for the apex bank despite the numerous achievements of the Cardoso-led bank in tackling economic challenges that have bedeviled Nigeria in the last one year.
Inflation which measures the standard of living of a people, depending on the number, has remained one of the biggest undoing of the Nigerian people as the cost of living has skyrocketed in the past few years.
Although inflation has dropped in the last two months, financial analysts said it is not yet ‘Uhuru’ as the figures might spike in September.
According to a report sighted by The Point, over 26 million Nigerians will further go down the poverty threshold due to food insecurity.
“Businesses that rely on credit for working capital or expansion projects are finding it harder to justify taking out loans with interest rates exceeding 25 per cent. Many have either slowed down growth or looked for alternative funding sources, including equity financing”
As the CBN Monetary Policy Committee prepares for its September 23-24 meeting, businesses across Nigeria are anticipating another potential interest rate hike.
Under Cardoso, the CBN has already increased the Monetary Policy Rate four times this year, raising it to 26.75 per cent.
These hikes, totaling 800 basis points, have been driven by persistent inflation, particularly in core and food sectors.
With inflation reaching 24.08 per cent in August 2024, many financial analysts believe another rate hike could be imminent.
An economic analyst, Okechukwu Eze, pointed out that while these increases help combat inflation, they also burden manufacturers who rely on loans.
He noted that while the increases are necessary to control inflation, they pose challenges for manufacturers relying on loans to fund operations.
“The elevated rates increase the cost of production, which may eventually be passed on to consumers,” Eze said.
Another financial analyst at Vetiva Capital, Nneka Okezie, said that “The financial pressure on companies is immense.”
He added that “Businesses that rely on credit for working capital or expansion projects are finding it harder to justify taking out loans with interest rates exceeding 25 per cent. Many have either slowed down growth or looked for alternative funding sources, including equity financing.”
He noted that manufacturers are particularly impacted, as banks offer varying lending rates.
“Prime rates for the most creditworthy borrowers range from 7.00 per cent to 22.00 per cent, while maximum rates can reach up to 48.00 per cent, making borrowing costly for businesses,” Okezie added.
Another expert at the Lagos Business School, Bamidele Akanbi highlighted the challenge facing the CBN.
He said, “While inflation is the primary concern, higher rates will further strain businesses already grappling with rising costs and limited credit access.
“Inflation remains stubbornly high, and without more action from the Central Bank, the risk of inflation spiraling out of control is significant. But the trade-off is that higher interest rates will further burden businesses already struggling with rising costs and limited access to affordable credit,” he said.
The chief economist at ARKK Economics & Data Limited, Samson Simon, said inflation will remain elevated throughout the year while growth in price level may cool off on the back of bumper harvest and the president’s tariff-free food importation.
“The economy will remain largely overheated for the foreseeable future,” Simon said.
He noted that raising interest rates might not have been effective in tackling high inflation thus far, cautioning that instead of aggressively hiking rates, the impact of previous increases should be observed.
“As monetary policy has a long and variable lag, the CBN should not be too hawkish and for too long,” the Abuja-based economist said.
The managing director, Time-Line Consults, Shuaib Idris, said a further hike in the MPR will not have the desired effect in reducing inflation, noting that the government should find ways to mop up excess liquidity in the economy.
“If the CBN doesn’t reduce the rates, they should leave it as it is. The quantum leap in the MPR is too high, and it is strangulating the business environment.
“The actual value of a dollar in naira terms should be about N900.
But because of this excess liquidity, we are now working with about N1560/$. What we need is a liquidity squeeze, to remove the excess liquidity in the system,” Idris added.
The analysts have therefore called for more fiscal measures to complement the reforms of the monetary authorities to stem the tide of accelerating inflation.
“Even though the CBN’s main focus is tackling inflation, it cannot do that alone as the main driver of inflation is food inflation. And the production of food is not within the CBN’s remit,” Simon said.
He noted that to come out of the woods, there is a need to tackle insecurity for farmers to go back to their farms, which will in turn increase agricultural yield through affordable and improved farm inputs.
Nigeria recorded a drop in inflation for two consecutive months of July and August 2024. Data from the National Bureau of Statistics published in September showed that the Consumer Price Index stood at 32.15 percent in August. It is the lowest level since March.
Cardoso had said in January this year that he will bring inflation down to 21 percent in 2024, and considering the two months drop recently achieved, the belief in some quarters is that inflation might continue to taper.
However, some other schools of thought have warned that inflation might spike as a result of the decision of the government to further worsen the accessibility of fuel by further increasing pump price from N617 per litre to N897 per litre as announced by the NNPCL in September.
As a result of the shocking increase, fuel prices have risen above N1, 000 per litre in some states in the country, further impoverishing all Nigerians.
The Chief Executive Officer, Financial Derivatives Company Limited, Bismarck Rewane, in a post-inflation review report, warned that a decline in inflation for two months does not suggest that it will continue to go down as expected in some quarters.
He noted that inflation risks remain elevated. Rewane further stated that it was not the tightening policy of the Monetary Policy Committee of the CBN that aided the current drops witnessed in CPI but the harvest season and base effect.
“Noteworthy, two readings are not a trend, especially as inflation risks remain elevated. A breakdown of the data showed that the continued moderation in inflation is largely due to the harvest season and base year effects. Year-on-year food inflation moderated to 37.52% from 39.53% in July,” he said.
Since drop in food inflation is the main reason why the CPI moderated for two months, FDC hopes the MPC will mellow down on its tightening stance to allow for output growth in the economy.
“The ease in inflationary pressures and the expansion in Q2 real GDP growth (albeit due to base year effects) will likely empower the MPC to opt for a pause in the tightening cycle. The aim will be to support output growth further and complement the federal government’s fiscal stimulus efforts.
“In the real sense, core annual inflation and monthly inflation rates (all items less farm produce and energy) increased to 27.58 percent and 2.27 percent, respectively, from 27.47 percent and 2.16 percent.
“The increase suggests that inflation is more structural than transient and could be attributed to currency pressures amid forex scarcity.
“The naira depreciated by 4.2 percent in August at the official market compared to 3.1 percent in July. Additionally, the upward movement in the core inflation rate indicates that underlying price pressures are building. If this trend continues, it could counteract any short-term improvements in the headline inflation trend.
“Recent occurrences like the 50% rise in PMS price with its knock-on effect on logistics and food prices, the 62.66% growth (y-o-y) in money supply (M3), and exchange rate volatility are factors that could potentially reverse the disinflationary direction,” Rewane argued.
Also, analysts at Futureview Research Ltd have predicted a rise in headline inflation to 32.40 percent in September.
“Regarding core inflation, we foresee a further increase driven by higher energy costs, increased naira volatility, and rising transportation expenses. As a result, we forecast core inflation to climb by 12bps to 2.39% m/m, pushing the y/y rate higher to 26.76% (August: 26.36% y/y). Accordingly, we project the headline inflation to increase by 2.29% m/m in September, cascading to a y/y inflation rate of 32.40% (August: 32.15% y/y),” they stated.
CBN’s tightening policy
When Cardoso assumed office as governor of the CBN on September 15, 2023, inflation was 26 percent.
Despite the tightening measure of the CBN which led to the base lending rate rising to 26.75 percent in July, inflation grew steadily to over 33 percent.
Precisely, in its fourth consecutive hike since February, the CBN recently increased the MPR by 50 basis points to 26.75 percent in July, from 26.25 percent.
“Inflationary pressures are expected to decline in 2024 due to the CBN’s inflation-targeting policy, which aims to rein in inflation to 21.4%,” Cardoso said in a speech, a copy of which the CBN shared by email.
He added that improved agricultural output and the easing of global supply chain pressures would boost consumer confidence and purchasing power.
The CBN is expected to pursue a more conventional monetary policy approach under Cardoso after years of unorthodox policies pursued by his predecessor, Godwin Emefiele.
In November 2023, Cardoso announced the adoption of an inflation-targeting framework.
President Bola Tinubu made a series of reforms after becoming the president last year, including scrapping a petrol subsidy and easing currency trading restrictions.
However the country still has a shortage of forex and suffers as a result of a wide gap between the official and parallel market exchange rates.
Nigeria has been battling a serious economic crisis due to the removal of petrol subsidies and a raft of measures adopted by the Federal Government, which the Cardoso-led CBN has deployed all monetary policy tools to fight.
“If the CBN doesn’t reduce the rates, they should leave it as it is. The quantum leap in the MPR is too high, and it is strangulating the business environment”
Experts argued that the tightening policy of the CBN has not achieved its desired impact in reducing currency in circulation aimed at curbing inflation.
Data from the CBN showed that rather than the currency in circulation shrinking, it’s expanding more.
Currency in circulation exceeded N4 trillion in June 2024, the first time in history.
The latest data from the CBN shows that the currency in circulation reached a year-high of N4. 05 trillion in June 2024, up by 56 percent from N2. 6 trillion in the same month of the previous year.
Hunger threat
Nigeria is expected to see about 26.5 million people grappling with high levels of food insecurity, as disclosed by the Federal Government and its partners.
Moreover, approximately 9 million children are at the risk of suffering from acute malnutrition or wasting. Of these, an alarming 2.6 million children could face Severe Acute Malnutrition and require critical nutrition treatment.
Predictable MPC outcome
As the MPC is set to meet on September 23-24, the committee will consider the disinflation and expansion in Q2 GDP growth.
Experts expect a hold decision to support output growth and complement fiscal efforts. They expect that the moderation in inflation will become noticeable at the end of the year.
