Again, the Monetary Policy Committee of the Central Bank of Nigeria raised the benchmark Monetary Policy Rate on Tuesday by 150 basis points to 26.25 per cent from 24.74 per cent. It is the third consecutive hike of the benchmark rate this year. This totals 750 basis points since February and has triggered alarm bells in the ranks of the Organised Private Sector.
The CBN’s MPR hikes this year entrench its hawkish stance, which has seen 11 rate increases since May 2022 as it struggles to contain the inflation rate and the more recent naira volatility.
Headline inflation stood at 33.69 per cent in April compared to 22.22 per cent a year ago. Food inflation was 40.53 per cent in April. The naira has plunged from N460/$ in May 2023 to N1,500/$ now with wild fluctuations ranging from N1,900/$ to N1,100/$ in between.
CBN Governor Olayemi Cardoso insists that the MPR rake hike was aimed at achieving price stability. He claimed that some success has been achieved with the inflation rate slowing and more positive results will soon be seen. Business owners fear that a high-interest regime will impair their ability to service their existing loans or access new ones.
There are concerns that further monetary tightening and the current Cash Reserve Ratio of 45 per cent for banks have already curbed liquidity in the system and stifled financial intermediation, the primary function of banks.
High interest rates will punish companies, especially small, and medium enterprises that form the backbone of any economy and are the major employers of labour. This segment is battling high operating costs, poor infrastructure, and multiple taxes.
Some commentators have accused the CBN of running out of ideas to tackle the problem. They argue that its 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 but are largely due to increased production costs tied to higher energy costs, the naira devaluation, and the pass-through effect from imported goods. Insecurity, which has negatively affected food production in key states such as Niger, Benue, and Kaduna, is driving up inflation.
There is also the suspicion that the CBN needs to hike rates to attract investors since inflation keeps eroding real returns. The two-year FGN Savings Bond for April was issued at 17.04 per cent per annum, while the three-year FGN Savings Bond was issued at 18.04 per cent per annum compared with 10.03 per cent per annum and 11.03 per cent per annum a year ago.
While the CBN should be credited with restoring transparency, inclusiveness, and convergence in the forex market, it must accept that one tool is insufficient to deal with the inflation crisis.
Fiscal measures should be implemented, including tariff cuts on industrial goods, pharmaceuticals, and certain foods to deal with the inflationary trend.
Insecurity must be addressed to increase food production locally. There must be a laser focus on foreign reserves accretion.
Nigeria’s foreign reserves fell to $32.29 billion in April, the lowest level in six years, and remain inadequate despite recent marginal gains. Robust foreign reserves are the key to price and exchange rate stability in the immediate future.
Big steps should be taken to unlock the value held in government-owned companies, assets, and infrastructure to free the economy from the burden of using 80 per cent of revenues to service debts.
Saudi Arabia raised $29.5billion by selling 1.5 per cent of its shares in state oil company Saudi Aramco. The Bola Tinubu administration can do the same with the public corporations to raise huge funds to refloat the economy and build the reserves instead of borrowing against future income as it is being done at present.
