EXCLUSIVE: Why CBN’s incessant hike in Monetary Policy Rate won’t tame inflation – Muda Yusuf

 A former Director-General of the Lagos Chamber of Commerce and Industry (LCCI) and Chief Executive Officer, Centre for the Promotion of Private Enterprise, Dr Muda Yusuf has posited that the decision of the Godwin Emefiele-led Central Bank of Nigeria (CBN) to incessantly hike the Monetary Policy Rate will not achieve the desired aim of taming inflation. 

NewsClick Nigeria reports that the apex bank had last week increased interest rates from 18% to 18.50%.

The CBN Governor, Godwin Emefiele, announced the decision last Wednesday after the policy-setting committee meeting at the CBN headquarters in Abuja.

“The trend of CBN monetary policy over the last few years has being that of policy tightening aimed at taming inflation.  But this policy choice has failed to reckon with domestic peculiarities driving inflation. The key drivers of Nigeria inflation are supply side variables, not demand driven.  The several hikes in  over the years have not had any significant impact on the inflation. If anything, the general price level became even more elevated,” Yusuf explained.

While recognising the apex bank’s mandate of price stability, the former LCCI DG said the bank’s approach might not provide the desired result in the long and short term.

“We recognize that the primary mandate of the CBN is price stability, but numerous headwinds had posed significant risks to this critical objective. Some of these include the surge in commodity prices and impact on energy cost, disruptive effects of insecurity on agricultural output, and global supply chain disruptions.  The hike in MPR would not change these variables.

“Already, bank lending has been constrained by the high CRR [many operators in the sector claim that effective CRR is as high as 50% or more for many banks], the discretionary debits by the apex bank and liquidity ratio of 30%. Lending situation in the economy is already very tight.

“The Nigerian economy is not a credit driven or interest rate sensitive economy, unlike what obtains in many advanced economies which have much higher levels of financial inclusion, robust consumer credit framework and strong correlation between interest rate and aggregate demand.  The level of financial inclusion in the Nigerian economy is still quite low, access to credit by households and MSMEs is still very challenging, and the informal sector accounts for close to 50% of the economy.”

According to the renowned economist, persistent hike in MPR only means that the cost of credit to the few beneficiaries of the bank credits had continued to increase.

“Private sector bank credit as a percentage of GDP is less than 20% in Nigeria. It is over 100% in South Africa and over 200% in the United States.  This underscores the variabilities across economies; thus, policy responses have to be different.

“The transmission effects of monetary policy on the economy are therefore still very weak.   In the Nigerian context, price levels are not interest sensitive.  Supply side issues are much more profound drivers of inflation.

Persistent hike in MPR only means that the cost of credit to the few beneficiaries of the bank credits had continued to increase with impact on their operating costs, prices of their products and profit margins.”

KEY DRIVERS OF INFLATION

The CPPE CEO identified key drivers of inflation as;

• Acute scarcity of foreign exchange affecting access to manufacturing and other inputs.
• Supply chain disruptions resulting initially from the pandemic, and now exacerbated by the Russian – Ukraine conflict.
• Security concerns disrupting agricultural output.
• Climate change effects on agricultural production.
• Structural constraints affecting productivity in the agricultural value chain and manufacturing.
• High transportation costs affecting distribution costs across the country. This is also reflected in the huge differential between farm gate prices and market prices.
• High and increasing energy cost.
• Monetization of fiscal deficit [CBN financing of deficit] which is highly inflationary because of the liquidity injection effects on the economy.
• High transactions costs at the nations ports increases production and operating costs of businesses.
• High import duty on intermediate goods and raw materials.
• Aggressive revenue drive by government agencies, taking a toll on cost of production

RECOMMENDATIONS TO CURB INFLATION

To reverse the spiraling inflation, Yusuf recommended government to fix the following:

• Address the security concerns causing disruption to agricultural activities.
• Reform the foreign exchange market to stabilize the exchange rate, reduce volatility and stimulate forex inflows.
• Address forex liquidity issues through appropriate policy measures.
• Fix the structural problems to boost productivity and competitiveness of domestic firms.
• Address the challenge of high transportation and logistics cost.
• Reduce fiscal deficit monetization to minimize incidence of high-powered money in the economy.
• Manage climate change consequences to reduce flooding and desertification.
• Ensure the restoration of normalcy and good order at the nations ports to reduce transaction costs.
• Reduce import duty on intermediate products and raw materials for industries to reduce production costs, especially in the light of the sharp depreciation in the exchange rate.
• Address concerns around high energy cost.
• Create an investment friendly tax environment to boost investments and output in the economy.