In trying to contain the hydra-headed monster, which inflation represents, the Central Bank of Nigeria (CBN) has to sacrifice growth, albeit momentarily, to pursue its target, writes JOSEPH INOKOTONG.
Policymakers in Nigeria seem intent on taming inflation from all indicators. To achieve the goal of price stability, which is one of its statutory functions, the Central Bank of Nigeria (CBN) typically needs to raise interest rates to a level that discourages borrowing, investment, hiring and spending. This will translate to higher mortgage rates, higher borrowing costs, lower asset prices, slower job growth and a weaker consumer.
In pursuit of containing inflation, the CBN’s Monetary Policy Committee (MPC) increased the benchmark interest rate by 200 basis points from 22.75 percent to 24.75 percent at the end of its 294th MPC meeting held in Abuja last month. It also announced an adjustment of the asymmetric corridor of +100/-300 basis points.
The CBN Governor, Olayemi Cardoso, who doubles as the chairman of the MPC, also announced that the apex bank retained the Cash Reserve Ratio (CRR) at 45 percent, unchanged from its last meeting but increased the CRR of merchant banks from 10 percent to 14 percent while retaining the liquidity ratio at 30 percent.
The present Monetary Policy Rate (MPR) of 24.75 percent is unusually high, reflecting the bank’s strong commitment to tackling inflation and exchange rate fluctuations.
The intent of this measure is to tame inflation. However, Professor Uchenna Uwaleke of the Nasarawa State University, Keffi, sees it differently.
He said, “Much as tightening is necessary at this time in view of elevated inflation, MPC should tighten policy incrementally and in a measured manner that optimises the CBN’s policy tool kit without undue reliance on the monetary policy rate.
“The decision by the MPC to increase the MPR by 200bps makes it a total of 600bps in just one month if one adds the 400bps delivered in February. This is in addition to a very high CRR of 45 percent, representing sterilised bank deposits.
“This development is now driving undue pressure by banks on the CBN’s Standing Lending Facility and increasing the cost of funds generally. The CBN should recognise that the challenge currently facing the Nigerian economy is not just inflation but stagflation and to this end should equally have regard to growth concerns in future meetings of the MPC.”
Despite the CBN’s efforts, inflationary pressure has not abated, although the pace of increase has slowed, albeit marginally. Prices of basic food items and services have remained consistently high beyond the reach of many people in the country.
This is exemplified by the Consumer Price Index (CPI) data released by the National Bureau of Statistics (NBS) on April 15.
In March 2024, Nigeria’s headline inflation rate increased to 33.20 percent, relative to the February 2024 rate, which was 31.70 percent.
Data released by the NBS showed that food inflation was 40.01 percent, making it a major contributor to the skyrocketing inflation.
Explaining how food prices pushed inflation up in March 2024, the NBS said, “The food inflation rate in March 2024 was 40.01 percent on a year-on-year basis, which was 15.56 percent points higher compared to 24.45 percent recorded in March 2023. The rise in food inflation on a year-on-year basis was caused by increases in prices of the following items: garri, millet, akpu uncooked fermented (which are under the bread and cereals class), yam tuber, water yam (under potatoes, yam and other tubers class), dried fish, sardine, mudfish dried (under fish class), palm oil, vegetable oil (under oil and fat), beef feet, beef head, liver (under meat class), coconut, watermelon (under fruit class), Lipton tea, Bournvita, Milo (under coffee, tea and cocoa class).
“On a month-on-month basis, the food inflation rate in March 2024 was 3.62 percent, which shows a 0.17 percent decrease compared to 3.79 percent recorded in February 2024.
“The fall in food inflation on a month-on-month basis was caused by a fall in the rate of increase in the average prices of guinea corn flour, plantain flour, etc (under bread and cereals class), yam, Irish potatoes, coco yam (under potatoes, yam and other tubers class), titus fish, mudfish dried (under fish class), Lipton, Bournvita, Ovaltine (under coffee, tea and cocoa class).
“The average annual rate of Food inflation for the twelve months ending March 2024 over the previous 12-month average was 31.40 percent, which was 8.69 percent points increase from the average annual rate of change recorded in March 2023 (22.72 percent).”
Looking at the movement, the March 2024 headline inflation rate showed an increase of 1.50 percent points when compared to the February 2024 headline inflation rate.
According to the NBS, on a year-on-year basis, the headline inflation rate was 11.16 percent points higher compared to 22.04 percent recorded in March 2023.
This shows that the headline inflation rate (year-on-year basis) increased in March 2024 when compared to the same month in the preceding year.
Furthermore, on a month-on-month basis, the headline inflation rate in March 2024 was 3.02 percent, which was 0.10 percent lower than the 3.12 percent recorded in February 2024.
This means that in March 2024, the rate of increase in the average price level is lower than the rate of increase in the average price level in February 2024.
The NBS explained that the percentage change in the average CPI for the 12-month period ending March 2024 over the average of the CPI for the previous 12-month period was 27.13 percent, showing a 6.76 percent increase compared to 20.37 percent recorded in March 2023.
The urban inflation rate was 35.18 percent, on a year-on-year basis, in the month of March 2024, indicating 12.11 percent points higher compared to the 23.07 percent recorded in March 2023.
However, on a month-on-month basis, the urban inflation rate was 3.17 percent in March 2024, this was 0.0001 percent points marginally and insignificantly lower compared to 3.17 percent recorded in February 2024.
The corresponding 12-month average for the urban inflation rate was 28.96 percent in March 2024, showing 7.96 percent points higher compared to the 21.00 percent reported in March 2023.
According to the NBS, rural inflation rate in March 2024 was 31.45 percent on a year-on-year basis, indicating 10.37 percent higher compared to the 21.09 percent recorded in March 2023.
On a month-on-month basis, the rural inflation rate in March 2024 was 2.87 percent, down by 0.20 percent points compared to 3.07 percent recorded in February 2024.
The corresponding 12-month average for the rural inflation rate in March 2024 was 25.50 percent. This was 5.71 percent higher compared to the 19.79 percent recorded in March 2023.
The “All items less farm produces and energy” or core inflation, which excludes the prices of volatile agricultural produces and energy stood at 25.90 percent in March 2024 on a year-on-year basis, up by 6.26 percent when compared to the 19.63 percent recorded in March 2023.
The highest increases were recorded in prices of the following items Bus Journey within the city (under passenger transport by road class), actual and imputed rentals for housing, consultation fee of a medical doctor (under medical services class) and pharmaceutical products, etc.
On a month-on-month basis, the core Inflation rate was 2.54 percent in March 2024. It stood at 2.17 percent in February 2024, an increase of 0.37 percent.
The average 12-month annual inflation rate was 22.26 percent for the 12 months ending March 2024. This was 5.04 percent points higher than the 17.22 percent recorded in March 2023.
“In analysing price movements under this section, it should be noted that CPI is weighted by consumption expenditure patterns which differ across States and locations. Accordingly, the weight assigned to a particular Food or Non-Food item may differ from State to State making interstate comparisons of consumption basket inadvisable and potentially misleading,” the NBS stated.
The NBS informed that in “March 2024, all items inflation rate on a Year-on-Year basis was highest in Kogi (39.97 percent), Bauchi (38.34 percent), Kwara (38.10 percent) and Oyo (37.29 percent), while Borno (25.78 percent), Benue/Taraba (28.12 percent) and Katsina (28.32 percent) recorded the slowest rise in headline inflation on year-on-year basis.
“On a month-on-month basis, however, March 2024 recorded the highest increases in Zamfara (3.90 percent), Abia (3.89 percent), Ondo (3.75 percent), while Borno (1.46 percent), Yobe (1.84 percent) and Adamawa (1.85 percent) recorded the slowest rise on month-on-month inflation.
“In March 2024, food inflation on a year-on-year basis was highest in Kogi (48.46 percent), Kwara (46.18 percent), Akwa Ibom (45.18 percent), while Nasarawa (33.76 percent), Borno (34.28 percent) and Bauchi (34.38 percent), recorded the slowest rise in food inflation on year-on-year basis. On a month-on-month basis, however, March 2024 food inflation was highest in Abia (5.17 percent), Cross River (5.14 percent), Bayelsa (4.75 percent), while Borno (1.59 percent), Yobe (2.08 percent) and Adamawa (2.12 percent) recorded the slowest rise in food inflation on month-on-month basis.”
On the foreign exchange (FX), Cardoso said, “We have done what we can to make the market open, transparent and liquid as much as possible.”
To stabilise the FX market, the CBN, last week, issued a circular announcing fresh sales of $10,000 to each licensed Bureau De Change (BDC) operator in the country at N1,021/$. The BDCs were directed to, in turn, sell to eligible end users at a spread of not more than 1.5 percent above the purchase price, translating to a maximum selling price of N1,036.15 per dollar.
This marked the second of such direct sales to BDCs in April and the fourth in the current year, indicating that the apex bank is proactive in managing the fluctuation of the naira and meeting essential foreign exchange needs of the people.
The CBN outlined the details of the sales in a circular it addressed to the president of the Association of Bureau De Change Operators (ABCON) and urged the BDCs to play by the rules.
The CBN’s intervention aims at addressing the retail-end market, particularly for invisible transactions such as travel allowances, tuition fees and medical payments, etc.
The circular states in part, “All eligible BDCs are therefore directed to commence payment of the naira deposit to the under listed CBN naira deposit account numbers from today, Monday April 22, 2024 and submit confirmation of payment, with other necessary documentations, for disbursement of FX at the respective CBN branches.”
On April 8, the CBN sold $10,000 FX to each of the 1,588 participating BDCs at a fixed rate of N1, 101/$ at a spread capped at 1.5 percent above the purchase price from the CBN.
Also, the CBN, in February, announced the sales of $20,000 to each BDCS at the rate of N1,301/$.
The goal is for these measures to beat back the inflationary spiral, but the price to pay may be stunted growth.
However, the good news is that the World Bank has revised upwards its 2024 growth projections for Nigeria from 2.9 percent projected in October last year to 3.3 percent for this year and 3.7 percent for 2025, in its January 2024 Global Growth Prospects.
Investors are still expecting this bout of inflation to be transitory. Consumer price inflation is still largely being driven by cost of food items that are impacted by strong demand from consumers, supply chain issues that are exacerbated by the transport, logistics costs and input shortages, whose roots go back to the insurgency war, banditry, kidnapping and beyond.
From the market’s assessment, there is probably still a long way to go before the fight against inflation is won. The last month’s 200 basis point rate hike probably won’t be enough to dissuade corporate management teams that are flush with cash from committing to capital expenditures that expand capacity or increase automation.
Millennial families that are seeing strong wage gains coming soon in the year probably won’t be discouraged from buying a new home because of moderately higher mortgage rates. A more aggressive CBN is a headwind to stocks, but a strong economic and earnings backdrop should carry the day.
As the year progresses, analysts will have to assess whether the CBN will need to actively restrict growth and break the economy to tame inflation. For now, it seems there are enough ways for inflation to recede toward more tolerable levels without an aggressive intervention.
The International Monetary Fund (IMF) has observed that policymakers who become complacent on risk are losing control over inflation again, even in countries where inflation has been moderate and manageable but persistent.
It stressed that one lesson that has been learnt from both the successes and the failures of anti-inflationary programmes in the transition countries is that even if comprehensive structural reforms are not preconditions for achieving low inflation, they appear to be essential to sustaining it.
In trying to nib in the bud of the hydra-headed monster, which inflation represents, the CBN has to sacrifice growth, albeit momentarily, to actualise its target. It would be an uphill task, if not an exercise in futility to attempt resolvving both issues at once.
Managing the trilogy of inflation, FX, and growth could be a daunting task if not an impossible one. It should not be left to the monetary authority alone but requires a concerted effort between the fiscal and momentary sides to achieve the desired result.
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