CBN should set pillars to drive the economy
The Central Bank of Nigeria (CBN) should establish clear economic pillars to drive growth, stability, and development. These pillars can serve as a roadmap for Nigeria’s economic progress. Macroeconomic Stability, Financial Inclusion, Agricultural Development, Industrialization, Infrastructure Development, Human Capital Development, Export-Led Growth. and Digital Economy
The Monetary Policy Committee of the Central Bank of Nigeria has raised the benchmark Monetary Policy Rate by 50 basis points to 27.25 percent from 26.25 percent. This is the fifth consecutive hike this year, totalling 850 basis points since February. It is the 12th time the MPC has raised rates in two years as the monetary authorities battle high inflation and stabilise the economy.
The recent meeting it retained the asymmetric corridor at +500 and -100 basis points around the MPR. It increased the cash reserve ratio for banks from 45 per cent to 50 per cent while retaining the liquidity rate at 30 per cent.
The CBN’s persistent monetary tightening stance means businesses must cope with higher borrowing costs. Increasing the CRR for banks means more loanable funds have been sterilised. This further impairs the financial intermediation capabilities of banks.
The implications in an economy where businesses are already reeling from high energy, logistics, and operating costs compounded by declining purchasing power that has forced some multinationals to abandon Nigeria.
The organised private sector insists businesses need stimulus to drive recovery and growth. With effective lending rates hovering around 35 percent, further rate hikes will have a crippling effect on manufacturers and other economic players.
SMEs, which account for 90 percent of businesses and already face huge difficulties accessing credit, are likely to be locked out.
Some commentators argue that the CBN focus is on a metric that has little to do with the problem. The argument is that rising prices in Nigeria are not demand-driven. They are due to increased production costs tied to higher energy costs, the naira devaluation, and the consequent pass-through effect from imported goods and insecurity, which has negatively affected food production.
Inflation jumped from 22.4 percent in May 2023 to 33.9 percent in May 2024, driven largely by petrol subsidy removal which has seen a five-fold increase in fuel prices and the devaluation of the naira from N460 in May 2023 to N1,675/$1 on Tuesday. The recent slowdown in inflation for two consecutive months to 32.15 percent in August, down from a record 34.19 percent in June, has been attributed to a seasonal drop in food prices.
The CBN Governor, Yemi Cardoso, admitted that the government has been largely responsible for the excess liquidity in the system due to borrowings (about N18 trillion) through Ways and Means for which little can be seen on the ground. Despite the rate hikes, real returns remain negative.
The CBN’s core mandate includes stabilising prices and the exchange rate, but other options can be explored, especially on the fiscal side. A fixation on interest rate hikes ignores the need to develop effective strategies to ensure proper economic management and sustainable growth in the long term.
The Federal Government’s expansionary stance is demonstrated in the widening deficit projected at N14 trillion in 2024 is bound to sustain inflationary pressure no matter the level of interest rate hikes.
IMF economists note that while monetary policy has the tools to subdue inflation, fiscal policy can put the economy on a sounder long-term footing through investment in infrastructure, health care, and education; fair distribution of incomes and opportunities through an equitable tax and transfer system; and provision of basic public services.
Food inflation at 37.52 percent compared with 29.34 percent in 2023, is a key driver of the headline numbers and can be dampened by massive investment in the agriculture sector and improving the security situation in the country’s food baskets.
The FG should prioritise a holistic approach, engaging stakeholders and ensuring effective implementation to revive Nigeria’s economy.
