The Centre for the Promotion of Private Enterprise (CPPE) has said that the outcome of the Monetary Policy Committee [MPC] meeting of 27th February 2024 would hurt the real sector of the economy which is already contending with numerous macroeconomic challenges.
Dr. Muda Yusuf, Director/Chief Executive Officer of CPPE, while reacting to the potential downside effects of the heightened monetary policy rate (MPR) in a statement said the increase of MPR from 18.75% to 22.75%; and cash Reserve Ratio [CRR] from 32.5% to 45% pose a major risk to the financial intermediation role of banks in the Nigerian economy.
Yusuf said the increase would constrain the capacity of banks to support economic growth and investment, especially in the real sector of the economy because the increases are quite significant.
He noted that although the decision was consistent with the typical policy response of the Central Banks globally, it failed to reckon with domestic peculiarities.
- “The key drivers of Nigeria inflation are largely supply-side variables, and the CBN ways and means financing.
- Over the last two years, there has been persistent monetary policy tightening, yet there has not been any significant impact on the inflationary pressures. If anything, the general price level had been continuously on the increase.
- We recognize that the primary mandate of the CBN is price stability, but numerous headwinds have 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,” he said.
Ways and Means Finance
Yusuf noted that the surge in ways and means of finance also makes the CBN a culprit in the inflation predicament over the past few years adding that the hike in MPR or CRR would not change these variables.
He said that already, bank lending has been constrained by the high CRR which was until the latest review, 32.5% [many operators in the sector claim that effective CRR is as high as 50% for many banks], the discretionary debts by the apex bank.
He added that the credit situation in the economy is already very tight, with lending rates ranging between 25 -30%.
Financial intermediation
According to him, the Nigerian banks are yet to live up to their financial intermediation role because of these constraining factors.
- “The Nigerian economy is not a credit-driven 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.
- Private sector bank credit as a percentage of GDP was 14% in 2022 in Nigeria. It was 59% in South Africa, 30.9% in Egypt, 30% in Botswana, 51.6% in the United States and 130% in the United Kingdom.
- These underscore the variabilities across economies; thus, policy responses have to be different,” he said.
Price levels not interest-sensitive
Yusuf said that the transmission effects of monetary policy on the Nigerian economy are still very weak adding that in the Nigerian context, price levels are not interest sensitive while supply-side issues are much more profound drivers of inflation.
He stated that the new dramatic increase in MPR to 22.75% hike means that the cost of credit to the few private sector that have exposure to bank credits will increase which will impact their operating costs, prices of their products, and profit margins, amidst very challenging operating conditions.
He added that the equities market may also be adversely impacted by the hike.
According to him, the CBN must accelerate the process of increased capitalization of the development finance institutions to create a concessionary financing window for the real sector and small businesses.
Key drivers of inflation
He listed the key drivers of inflation to include 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, and lately the Israeli-Hamas war, security concerns disrupting agricultural output, climate change effects on agricultural production, structural constraints affecting productivity in the agricultural value chain and manufacturing and high transportation costs affecting distribution costs across the country which are also reflected in the huge differential between farm gate prices and market prices.
Others are high and increasing energy costs, especially the cost of diesel, monetization of fiscal deficit [CBN financing of deficit] which is highly inflationary because of the liquidity injection effects on the economy, high transaction costs at the nation’s ports, high import duty on intermediate goods and raw materials and aggressive revenue drive by government agencies.
Recommendation to curb inflation
To reverse the spiralling inflation, he noted that the government needs to fix the following:
- “Address the security concerns disrupting agricultural activities, sustaining reforms in the foreign exchange market to stabilize the exchange rate, reduce volatility, and stimulate forex inflows. address forex liquidity issues through appropriate policy measures incentives forex inflows into the economy and fixing the structural problems to boost productivity and competitiveness of domestic firms”.
