In this piece, James Emejo assesses CBN responses to inflationary concerns, concluding that the fiscal authority should do more to complement the monetary side in mitigating its impact on the economy.
For the avoidance of doubt, the Central Bank of Nigeria (CBN) Act, 2007 accords the apex bank the overall control and administration of the monetary and financial sector policies of the federal government.
The primary mandate of the bank is to ensure monetary and price stability; issue legal tender currency in Nigeria; maintain external reserves to safeguard the international value of the legal tender currency; promote a sound financial system in the country; and act as banker and provide economic and financial advice to the federal government.
The CBN is also saddled with the responsibility of administering the Banks and Other Financial Institutions (BOFI) Act (1991) as amended, with the sole aim of ensuring high standards of banking practice and financial stability through its surveillance activities, as well as the promotion of an efficient payment system.
In addition to its core functions, CBN has over the years performed some major developmental functions, focused on all the key sectors of the Nigerian economy including financial, agricultural and industrial sectors among others, through its various departments.
Inflation and price stability
Inflation, which is the rate of increase in the prices of goods and services, has in recent times remained a growing challenge to the central bank’s efforts to maintain price stability in the economy.
Nigeria’s Consumer Price Index (CPI) which determines the inflation rate increased to 18.60 per cent year on year in June, compared to 17.75 per cent in the corresponding month of 2021 – and had been on the upwards trajectory in the preceding months, according to data from the National Bureau of Statistics (NBS). This is the highest rate of change in prices recorded since January 2017.
Inflationary pressures had been compounded by the ongoing war between Russia and Ukraine, which had contributed to a major commodities supply chain disruption globally since February.
But even before the war broke out, the Nigerian economy had been battling rising inflation mainly caused by structural challenges in the country rather than monetary effects.
This perhaps explains why in spite of all the interventions on the CBN through the deployment of its monetary tools, inflation had persisted.
CBN Governor, Mr. Godwin Emefiele, during the unveiling of his five-year policy thrust of the bank (2019-2024) targeted to curb inflation to a single digit of six to nine per cent by working closely with the fiscal authorities.
It is important to note, however, that the central bank had continued to respond to the threat posed by rising inflation to price stability by deploying an array of monetary instruments including raising the Monetary Policy Rate (MPR), otherwise known as the interest rate; sale of securities to mop up money in circulation; introducing the loan to deposit ratio policy to encourage lending to the private sector in order to stimulate production among other policy intervention efforts by the bank.
However, as pointed out by Emefiele and stakeholders, it is not that the CBN’s monetary tools are ineffective in tackling inflation, but the fact remains that current inflation had been caused by structural challenges in the country rather than monetary limitations.
For instance, over the past few years, inflation had been dominated by higher food prices largely because farmers are unable to access their farms as a result of the worsening insecurity across the country, which could only be addressed by the fiscal authority.
The composite food index, year on year rose by 20.60 per cent in June; yet, there are other challenges of infrastructure and a hostile business environment all of which could only be addressed by policy interventions on the fiscal side.
Effects of inflation on borrowing
There is no gainsaying the fact that inflation had led to the erosion of the value of the Naira and made the cost of borrowing from commercial banks more expensive in recent times – as well as a general increase in prices of essential commodities.
Only last week, while citing the impact of rising inflationary pressures in Nigeria and across the world, the Monetary Policy Committee (MPC) of the CBN raised the benchmark Monetary Policy Rate (MPR) by 100 basis points from 13 per cent to 14 per cent.
This came barely two months after the bank in May had reviewed the benchmark rate upwards by 150 basis points from the 11.5 per cent it was for about two and a half years. Emefiele said the decision to raise MPR was informed by the MPC members’ concerns over the persisting inflationary pressures.
Emefiele, after the two-day meeting of the committee, further expressed concern over the continued aggressive movement in inflation even after the rate hike in the previous meeting and expressed its unrelenting resolve to restore price stability while providing the necessary support to strengthen our fragile economy.
Monetary intervention yields positive results
No doubt, the CBN’s monetary interventions against inflation had been positive, after all.
Analysts believe that but for the wisdom of the MPC in dealing with inflation, the negative effects of rising prices would have been catastrophic for the economy. Despite the relative depreciation of the local currency, the value of the Naira remains strong compared to other currencies in Africa, which had been impacted by the global commodities supply challenges.
Just recently, currency in circulation dropped by N72.5billion or 2.2 per cent from N3.33trillion at the end of May to N3.26 trillion at the end of June 2022, according to the apex bank, thanks to the monetary policy instruments deployed to consistently check inflation.
Several of the CBN’s development finance initiatives have also helped in no small measure to mitigate inflation by stimulating production to address demand-supply gaps. This is on the back of several monetary policies adapted by the apex bank to mop-up liquidity in the economy to tackle inflationary pressure.
The fiscal gaps
The fiscal authorities have severally been blamed for failing to complement the efforts of the monetary authorities in confronting the challenges posed by inflation in the economy. Oftentimes, when the CBN had done its own part by utilizing its tools, the executive arm of government in particular often use bureaucracy as well as politics to diminish the importance of such economic decisions.
The MPC has severally called on the federal government to carry out its own responsibility by addressing the insecurity and infrastructure as well as policy actions on fuel subsidy among others, but often times this comes to no avail.
Speaking to THISDAY on the development, Chairman, Chartered Institute of Bankers of Nigeria (CIBN), Abuja Branch, Prof. Uche Uwaleke, said the apex bank appeared to be on top of the game when it comes to tackling inflation, adding that the fiscal side needed to proactive as well.
He said, “In the area of taming cost-push inflation in Nigeria, the CBN has been implementing a raft of interventions in line with its development Finance function.
These interventions include those in Agriculture especially the Anchor borrower programme, designed to ramp up food supply in view of the fact that the price pressure is coming more from the rising cost of food production as well as concessional, single-digit lending facilities, through participating banks, to Small and Medium Enterprises.
“Also, the CBN is known to have intervened in the electricity sector in order to improve power supply as well as the airline sector to reduce the cost of air travel in the country.
Furthermore, under the Loan to Deposit ratio policy, the CBN has ensured that the banks channel more credit to the private sector.”
According to him, the fiscal authority can complement the efforts by the apex bank by “dealing squarely with the rising insecurity which is negatively impacting food output, borrowing less from the domestic market which is driving up interest rates and raising the cost of capital on the part of firms and in collaboration with the private sector, exploring innovating means of revamping dilapidated infrastructure, especially roads and railways to reduce the cost of transportation.
“The fiscal authorities should equally implement urgently a roadmap for improved power supply focusing on off-grid solutions and independent power projects by the private sector as well as incentivising the establishment of modular refineries with a view to ending imports of petroleum products so the country does not depend significantly on the Dangote refinery when it commences operations.”
Uwaleke pointed out that through synchronisation of monetary and fiscal measures, the rising commodities’ prices driven by high cost of transportation, fuel and electricity can be tamed.
Also, Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, acknowledged that the CBN had indeed deployed all the tools at its disposal to stem inflation to no avail, adding that this could be “attributed to other macroeconomic factors that are affecting inflation which has not allowed inflation to abate.”
He said, “The federal government can complement the efforts of the CBN by employing fiscal policy to enhance production, increase tax with concessions in critical sectors like oil and gas, mining and agriculture while also encouraging investors with incentives in the areas of steel production, machine tools manufacturing and key agricultural implements and inputs.
“The federal government should also discourage the importation of some key items to allow the development of local alternatives. The federal government should also stop cronyism in the area of foreign exchange waivers and concessions to individuals who are not using foreign exchange for local development.”
Gbolade said also maintained that if the fiscal policies of the federal government can balance the monetary policy efforts of the CBN it would go a long way in attacking inflation.
On his part, Managing Director/Chief Executive, Credent Investment Managers Limited, Mr. Ibrahim Shelleng, said the fiscal side needed to intervene in critical sectors by spending in those areas and providing subsidies in order to complement the efforts of the CBN.
He said, “For example, subsidizing food will certainly reduce the effects of inflation. The CBN has used a number of monetary policy tools over time but the effects have not been particularly significant in controlling inflation largely due to the nature of inflation in Nigeria. Inflation has been largely driven by cost-push dynamics caused by macroeconomic factors.
“The CBN over the years has increased reserve requirements for commercial banks, had numerous open market operations, and raised interest rates all in the efforts to mop up system liquidity but this has largely been ineffective. The apex bank has also delved into aspects of the fiscal side through development financing directly to the real sector.
“This has also had limited success as the absorptive capacity of credit is hampered by structural challenges. Also, providing adequate infrastructure and having favourable policies that encourage real sector growth will go a long way in encouraging domestic production which is critically needed.”
