By Clara Nwachukwu
On the excuse to rein in rising inflation, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), Tuesday, hiked interest rate again to 26.25%.
But experts believe the Committee’s continuous tightening stand may be counterproductive in view of prevailing economic realities, being the third consecutive raise this year alone since the CBN Governor, Olayemi Cardoso, began chairing the MPC meeting from February end.
Indeed, the more the Committee tightened the noose by raising the rate from 18.75% to 22.75% at takeover, and then to 24.75%, the higher the inflation jumped from 31.70% in February to 32.20% in March, and to 33.69% in April, according to the National Bureau of Statistics (NBS).
Nevertheless, the Governor believes the MPC’s stance “is working” and “beginning to get some relief.”
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He argued that “Following an extensive review of risks and the near-term inflation outlook, the balance of risks suggests further tightening of policy to build on the benefits accrue from previous rate hikes,”
Briefing journalists on the outcome of the 295th meeting of the MPC in Abuja, Mr. Cardoso said the Committee retained the asymmetric corridor at +100 basis points and -300 basis points around the Monetary Policy Rate (MPR).
Members also retained the Cash Reserve Ratio (CRR) at 45% for deposit money banks (DMBs) and 14% for merchant banks, as well as the Liquidity Ratio (LR) at 30%.
Defending the policies
Alluding to the effects of the MPC policies, the CBN Governor said: “In terms of looking at the inflationary figure over the past year, inflation is indeed getting more and more of an issue. And, frankly, the need to moderate that by saying that any kind of inflation in my view is an issue.
“However, I think there is light at the end of the tunnel, and that is because as much as we see an increase in the inflationary figures when you go down to the specifics in terms of food, core and headline, you’ll see that it is moderating and decelerating in increment, and that’s the good news.
“Because for the first time since October, we’ve seen a relatively significant moderation in the rate of increase on the news components of inflation that I was talking about.
“I believe very strongly that the tools that the central bank is using are working.
“I’ve said several times, and I’ll say it again, there’s no magic wand. These are things that need to take their own time. They pass through and the effect of the measures in advanced countries; in developing countries, they do take time.”
The new rate hike is an additional burden on investors who have exposures to bank credit facilities.
Too tight for investors
But economic analysts are not as optimistic as Mr Cardoso is regarding the MPC policy position, and do not see a light yet at the end of the tunnel.
Specifically, Deputy Managing Director at Afrinvest West Africa Ltd., Victor Ndukauba, told Sustainable Economy Nigeria that “The consequence of the Cardoso team dropping the ball on tightening at this point is grave.”
This, he said, is because, “the fiscal guys (Ministry of Finance), have not made any significant breakthrough in terms of attracting patient long term capital, curbing oil theft, and taming insecurity.”
He noted that the decision to further tighten the rate, reaffirms the MPC’s “strong stance for pursuing exchange rate and price stability goals.”
He added that “Although this approach is costly (in terms of cost of fund burden and slowdown in economic growth), the Cardoso team wants to do all they can to see how far they can deliver short term relief in these two areas hoping the fiscal guys would pull their weight.”
Mr Ndukauba is not alone in his prediction of “grave” consequences, because as far as the Centre for the Promotion of Private Enterprise (CPPE) is concerned, “previous rate hikes have been quite aggressive, hurting output and real sector investments.”
Reacting to the rate hike, the Director of CPPE, Muda Yusuf, said the Centre had hoped the MPC would pause the rate hike for several reasons.
“Most economic operators with credit exposures to the banks have not recovered from previous hikes. Interest rates were already around 30%,” he explains.
Besides, he added: “The new rate hike is an additional burden on investors who have exposures to bank credit facilities. Naturally, the Central Bank is expected to adopt a rigid monetarist disposition. But we need to consider the economic costs.”
Dr Yusuf continued: “The extant CRR of 45% has profound liquidity effects on the financial system. Both measures dampen financial intermediation, which is the banks’ primary role in an economy.
“Thirdly, the monetary policy transmission channels are still very weak, given the level of financial inclusion in the economy. This limits the prospects of monetary policy effectiveness.”
“Hopefully, with the positive outlook for domestic refining of petroleum products, we may begin to see a moderation in energy costs and a pass-through effect on the general price level. This is one silver lining that is on the horizon at the moment.
“Necessary fiscal policy support is urgently needed to compensate for the adverse impact of extreme monetarism on the economy,”
Agreeing on the adverse consequences, a professor of finance and capital market, and former finance commissioner in Imo state, Uche Uwaleke, was quoted as saying that “The hike in the MPR by a further 150bps will most likely have an adverse consequence on the equities market given the inverse relationship between interest rates and equities market returns.”
Furthermore, he said: “It has the potential of triggering portfolio rebalancing in favour of fixed income securities. If I were a member of the MPC, I would have voted for a hold position as the aggressive policy rate hike is taking a toll on output. Production is stifled because of the very high cost of funds.
“Moreover, the seeming overreliance on the MPR as a tool to tame inflation does not appear to be making any meaningful impact due to the significant non-monetary factors driving inflation in Nigeria, such as high cost of energy, transport as well as insecurity in the food-belt regions of the country.”
Against this backdrop, Mr. Ndukauba expressed the hope that “the next move of the Cardoso team would be to support the fiscal guys (especially the Finance Minister) to consider attracting several conditional-tied bilateral loans from the International Monetary Fund (IMF), World Bank (WB), and the Africa Finance Corporation (AFC).”
He noted that Egypt has done (over $10billion from these agencies and over $30billion from Arab countries for the next three years beginning from 2023) since the organic channels for Nigeria to build foreign exchange (FX) wall chests are not being optimized.
He also warned that time is of the essence as failure by both the fiscal and monetary policy managers to provide relief before everything goes hay wire in the next six to 12 months, portend even worse consequences, as there could be an uptick in both the exchange and inflation rates to about N2,000/$ and 40% levels in a base case.
Mr Yusuf equally expects that “with the positive outlook for domestic refining of petroleum products, we may begin to see a moderation in energy costs and a pass-through effect on the general price level.
“This is one silver lining that is on the horizon at the moment. Necessary fiscal policy support is urgently needed to compensate for the adverse impact of extreme monetarism on the economy.”
