Renewed Effort to Curb Inflation

During the annual dinner of the Chartered Institute of Bankers of Nigeria, Governor of the Central Bnk, Olayemi Cardoso, unveiled a crucial policy agenda focused on curbing inflation. Nume Ekeghe highlights the pivotal takeaways

Inflation figures have in recent years steadily risen, soaring to 27.33 per cent as at October this year, according to the latest data by the National Bureau of Statistics (NBS). Whilst the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has consistently hiked benchmark interest rate to curb the spiraling inflation, it has steadily headed north.

However, the apex bank under the leadership of its new governor, Dr Olayemi Cardoso has declared that it has begun a fresh approach to tackling the spiraling inflation in the country. He had communicated this at the 2023 Annual Bankers Dinner that was held in Lagos at the weekend.

Noting that global inflation is forecasted to steadily decline from 8.7 per cent in 2022 to 6.9 per cent in 2023 and 5.8 per cent in 2024, due to tighter monetary policy measures and lower international commodity prices, Cardoso said, “It is crucial to note that monetary policy actions and frameworks play a vital role in anchoring inflation expectations during these challenging times.

“Globally, core inflation is expected to decline more gradually, and inflation is not anticipated to return to target levels until 2025 in most cases. In response to these challenges, countries worldwide have adopted various conventional monetary policy measures. Available data indicates a gradual recovery in output in the US, UK, and some emerging market economies.”

He added, “Gross Domestic Product (GDP) growth in the United States of America, the United Kingdom, and emerging market economies reached 2.2 per cent, 1.4 per cent, and 3.4 per cent, respectively, in the second quarter of 2023, compared to the same period in 2022. In Africa, countries such as South Africa, Ghana, Egypt, and Kenya saw growth rates of 0.6 per cent, 3.2 per cent, 3.9 per cent, and 5.4 percent, respectively, in the second quarter of 2023, thanks to complementary fiscal and monetary policy measures.

“The widespread tightening of monetary policy, aimed at curbing inflation, has restrained economic activity and suppressed growth. According to the IMF, global growth is projected to slow from 3.5 per cent in 2022 to 3.0 per cent in 2023 and 2.9 per cent in 2024, well below the historical average of 3.8 percent (2000-2019). Advanced economies are expected to experience a slowdown from 2.6 per cent in 2022 to 1.5 per cent in 2023 and 1.4 per cent in 2024 as the impact of policy tightening takes hold. Meanwhile, emerging markets and developing economies are projected to have a modest decline in growth from 4.1 per cent in 2022 to 4.0 per cent in both 2023 and 2024.”

Domestic Inflation Impact

Back home, Cardoso pointed out that the domestic factors affecting Nigeria’s economic performance span a wide range, encompassing both social and economic aspects. “Insecurity remains a pressing issue, affecting the agricultural, industrial, and services sectors simultaneously. The persistently high levels of insecurity have resulted in decreased national output and productivity, as many farmers have been unable to access their farmlands, disrupting supply chains and major economic activities. This has led to food shortages and inflation in various parts of the country.

“A thorough assessment of the economy reveals significant challenges, including high and rising inflation, inadequate foreign exchange supply, depreciation of the exchange rate, limited external reserves, weakened output, and high unemployment. These challenges have led to increased interest rates, discouraging investments in productive activities.

“I recently met with a group of small business owners who expressed their concerns about the impact of inflation on their operations. They shared stories of struggling to maintain affordable prices for their customers while facing rising costs for raw materials and supplies, “he said.

He further stated, “The instability caused by inflation not only affects their profit margins but also hampers their ability to plan for the future. These entrepreneurs stressed the need for price stability to create a conducive business environment that allows them to thrive and contribute to the economy.

“In recent discussions with individuals from different walks of life, I encountered a young family trying to make ends meet in the face of rising prices. They shared their worries about the erosion of their purchasing power and the challenges of meeting basic needs within a tight budget. They emphasized the importance of stable prices to protect the well-being of ordinary citizens and ensure a fair distribution of resources. It is crucial that we prioritize price stability to safeguard the livelihoods of our fellow Nigerians.”

Thus, he stressed the need for the apex bank to adopt a new strategy towards subduing a rising inflation in the country. According to the CBN governor, the apex bank will be wielding orthodox monetary policies in targeting inflation.

Stressing that monetary and price stability will be its focus, Cardoso said, “This is not just a technical objective, but it has real-life implications for the wellbeing of our citizens. Through targeted policies, transparent market operations, and coordination between monetary and fiscal authorities, we can ensure a more stable exchange rate, control inflation, and create an enabling environment for businesses and individuals to thrive.

Towards Curbing Inflation

Cardosoproposed strategies that involve employing orthodox monetary policies, emphasizing monetary and price stability through measures like Open Market Operations (OMO), Treasury Bills offerings, and adjustments in facilities such as the Standing Deposit Facility (SDF) and Cash Reserve Requirement (CRR) debits.

In addressing domestic challenges, the governor highlighted the impact of insecurity on Nigeria’s economy.

He pointed out how insecurity disrupted supply chains, particularly in agriculture, leading to food shortages and subsequent inflation.

He noted that engagement with stakeholders played a key role in identifying the adverse effects of inflation on businesses and individuals as his interactions with small business owners and citizens highlighted the importance of stable prices in supporting businesses and protecting purchasing power.

The governor stressed the need for collaborative efforts between monetary and fiscal authorities, aiming to stabilize the exchange rate, control inflation, and foster an enabling environment for economic growth.

“Continuous assessment and enhancement of the effectiveness of monetary policy tools were emphasized. Efforts were directed at fixing monetary transmission mechanisms to ensure decisions made during Monetary Policy Committee (MPC) meetings translate effectively into desired outcomes.

“Additionally, the establishment of a new liquidity management committee within the Bank signals a commitment to monitor liquidity conditions daily. This proactive approach aims to maintain optimal liquidity levels and respond promptly to changing economic dynamics, “he stated.

The CBN boss added, “These strategies encompass tightening monetary policies, addressing domestic challenges, stakeholder engagement, policy coordination, continuous assessment, and responsive monitoring. Governor Cardoso’s proposals aim to effectively manage and ultimately curb inflation in Nigeria.

“We have critically reviewed the effectiveness of the Central Bank’s monetary policy tools and have spent time fixing the transmission mechanism to ensure the decisions of MPC meetings actually result in desired objectives. For quite some time, there has been a dislocation of our monetary transmission mechanisms rendering the MPC meetings largely ineffective.

“I am happy to report that our efforts over the past two months have begun to yield fruit. Regular Open Market Operations (OMO) to mop up excess liquidity from the banking system. An OMO auction was recently held with a stop rate of 17.5% for the one-year tenor, attracting oversubscription of N350 billion. Another round of OMO has been approved to further reduce excess liquidity.”

“Offering N108.1 billion worth of Treasury Bills with three tenors to the investing public, which can help reduce liquidity in the banking system and support government fundraising. Removal of the cap on the remunerable Standing Deposit Facility (SDF) to increase activity in the SDF window and manage liquidity.

“Sustained Cash Reserve Requirement (CRR) debits, which have moderated liquidity in September and October 2023. Liquidity in the entire banking sector has been significantly reduced to under N100 billion in November. Inauguration of a new liquidity management committee within the Bank that meets daily at 8am to assess liquidity conditions and ensure optimal levels.

“These measures have already started to yield results, as excess liquidity in the banking system has significantly reduced and the Overnight Bank Borrowing (OBB) rate has increased to a level consistent with the monetary policy program. Month-on-month inflation has also begun to decline, with a growth rate of 0.67 per cent in October compared to 0.97 per cent previously.

“While absolute inflation is still rising, the declining rate of growth indicates progress. The CBN is confident that with continued tightening measures for the next two quarters, we will be able to effectively manage inflation. ”he said.

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