In the face of economic and financial challenges, members of the rate-fixing arm of the Central Bank of Nigeria (CBN), the Monetary Policy Committee (MPC), will face tough choices in the next two days as the sustained inflationary pressure remains a major challenge for the apex bank.
It will be the second interest rate hike in two months if the most likely choice scales the voting hurdle as the Committee begins its 286th meeting.
The committee is boxed in between expressing its independence or jumping on the bandwagon of hawks, who are throwing everything into the ring to tame surging inflation.
The stakes are indeed high. Growth is flattening or falling, heightening fear of the worst stagflation in recent years. In the first quarter, the economy grew at 3.1 per cent, a far cry from the expectations of government. Data of the second quarter are not ready.
The Consumer Price Index (CPI), which measures the rate of change in prices of goods and services, maintained its upward trajectory to 18.60 per cent year-on-year in June, compared to 17.75 per cent in the corresponding month of 2021, according to the National Bureau of Statistics (NBS).
This is the highest rate of change in prices recorded since January 2017 month-on-month, the headline inflation rate also strengthened to 1.82 per cent in June and 1.78 per cent in May.
The rising inflation poses a significant challenge to the CBN, in particular, which had hoped to contain the index within the six per cent to nine per cent band.
The MPC, while citing inflationary concerns, during its last meeting in May, had resolved to raise the Monetary Policy Rate (MPR) by 150 basis points to 13 per cent in response to the global inflationary pressures, which had continued to hurt economies around the world, after holding the benchmark rate constant at 11.5 per cent for about two and a half years.
The MPR is the rate at which the apex bank lends to commercial banks and often determines the cost of funds in the economy. But there seems to be consensus that the performance was dented by rooftop diesel costs that forced many businesses to halt or stagger operations amid heightened political risk.
As the MPC meets, analysts said inflation was likely to top its agenda following the current commodities supply gaps in the global economy, occasioned primarily by the war between Russia and Ukraine, which had sent energy prices to the ceiling.
The meeting is everything but usual. Ahead of the session, members were locked away in Ibeju-Lekki at the weekend, to “assess its framework” and interventions of the past eight years.
CBN Governor and Chairman of the committee, Godwin Emefiele, had said the apex bank, with about 150 staffers holding Ph.D. degrees in different fields of economics, does not lack the intellectual capacity and expertise to innovate an unconventional policy thrust to rescue the economy.
But experts are worried that monetary prescriptions, which are essentially short-term, may have been constrained by the failings of fiscal authority and mounting recklessness in the political space.
If the MPC hopes a further rate hike would cool inflation and rein in stability, it would be reminded of the seeming impotency of the previous upward review. In one fell swoop, MPC moved the benchmark rate up by 150 basic points (bps), from 11.5 per cent to 13 per cent.
Sadly, inflation, a supposed decreasing function of interest rate, surged further by 90 bps the following month. It rose from 17.7 per cent in May to 18.6 per cent in June, showing that prices could be sticky. But beyond that, inflation rates across the globe are reinforcing price volatility from one national economy to another through imports.
Meanwhile, last weekend’s NBS report has rubbished claims made by President Muhammadu Buhari on how the policies of his administration have impacted on the nation’s economic security.
President Buhari had last week said his government policies had helped protect Nigeria against the negative impact of the Russia-Ukraine war, as well as that of COVID-19 pandemic on the global economy. He said the administration had made investments in the last seven years to ensure food security in Nigeria, which prepared the country for the inevitable disruptions in global agricultural supply.
He made the assertion to defend his statement in a recent interview with Bloomberg, citing that Nigeria once depended on rice importation, but now produces.
“I said we must grow what we eat and eat what we grow. We have always been very conscious of the need to achieve food security in Nigeria, and to encourage our local farmers and rural economies.
“This is a country that was once dependent on foreign rice. Confident that we can grow and eat Nigerian rice, we closed the border to foreign rice, and also put policies in place to support local production. Today Nigerians are eating homegrown rice,” he claimed.
But in its monthly consumer price index (CPI), which monitors prices of goods and services purchased by Nigerian households, the NBS disclosed that inflation has climbed higher.
This is the highest level in 65 months. This means last month recorded the highest cost of living in five years, with food inflation soaring to 20.60 per cent, as prices of common household food, bread and cereals, food products, yam, meat, fish and oil skyrocketed.
NBS report indicated that the ripple effect of Russia-Ukraine war and the leftover effect from COVID-19 pandemic spilled into Nigeria, raising cost of living, despite President Buhari stating that his policies were protecting the country from the disruption and shocks caused by the two events.
Earlier last week, Bismarck Rewane, chief executive of Financial Derivatives Company (FDC) Limited, warned that Nigeria’s headline inflation would mimic global trends, especially because of the country’s over-dependence on other economies.
Ahead of the June CPI release at the weekend, Rewane disclosed that the headline inflation would hit 44.5 per cent if the consumer basket is reconstructed to align with the correct consumption pattern. According to him, the weight assigned to food and non-food inflation figures does not reflect the consumption realities.
The country’s CPI was last reviewed in 2009 with 518 points assigned to food and non-alcoholic beverage. Communication, with its recent advancement as a major consumable service, was signed 6.8 points while recreation/culture got 6.87 points. Rewane said the template ought to be reviewed every five years to reflect fast-changing consumption trends.
His company proposed a new template, assigning 55.54 per cent to food and non-alcoholic beverages in contrast to its current weighted average of 51.8 per cent. Housing, water, electricity and gas were given a weighted average of 10.72 per cent as 16.73 per cent NBS uses for its inflation computation. It assigned 4.53 per cent to clothing and footwear compared to NBS’ 7.65 per cent.
Godwin Owoh, a professor of applied economics, had similarly dismissed Nigeria’s CPI as a product of armchair research. Last year, when the composite figure was still about 15 per cent, Owoh said an independently conducted and professionally computed CPI would not be less than 30 per cent, alleging that the published NBS figures are doctored to achieve politically-accepted data.
An independent survey conducted by the Lagos Business School last November had put the average year-to-date (YTD) changes in the prices of essentials at about 97 per cent.
The Guardian’s survey at the close of last year also revealed that prices of essential consumables in the food and non-alcoholic beverage segment of the CPI increased by 50 to 100 per cent.
Even with the ‘discounted’ data, Nigeria ranked eighth on the World Bank’s list of 10 top countries with the worst inflation rate last year. With an annual inflation rate of 16.95 per cent, the country’s inflation was 13.53 percentage points worst than the global inflation average.
“The monetary authority is labouring in vain. Monetary authority dwells on the money supply. Unfortunately, money does not drive the economy but is an enabler. The economy is rather driven by production and trade, which are under fiscal authority. The monetary authority has exhausted its tools as demonstrated by continual rising inflation despite the rate hike,” David Adonri, the Vice President of Highcap Securities Limited, said.
He said the most appropriate option before national economic managers are to explore a fiscal framework to incentivise trade and production. Otherwise, the economy would continue its race to the bottom, notwithstanding the ingenuity of the MPC.
But Adonri faulted the ability of any fiscal intervention to make a significant change, observing that structural deficiency and rising insecurity have also limited the inherent potency of fiscal framework to pull the economy out of the woods.
Against the obvious odds, Emefiele said innovative ideas, beyond textbook recommendations, could help to save the economy. He said the pre-MPC meeting retreat would allow members to appraise their inputs in the economy to stick to the existing framework, tweak it or adopt an entirely new approach as different countries seek uncommon solutions to rescue the economy. He, however, acknowledged the limited fiscal space.
“While the Nigerian economy has been engulfed in many crises, just like many other countries of the world, we have been able to relatively withstand the storm and have performed far better than many of our pairs, courtesy of our bespoke and ingenious approach of adopting well thought out and home-grown policy measures to address our macroeconomic challenges.
“Monetary policy has been severely challenged, as its policy space narrowed significantly, in some cases, paradoxically and necessitating the need to rethink monetary policy in the context of emerging challenges and economic transformation,” Emefiele noted.
The governor hinted that an import-dependent country like Nigeria, which needs capital inflow to fulfill its obligations, cannot afford to disregard global trends; but the clarity in guessing the direction of MPC’s meeting is dented by his call, as usual, for inward-looking measures.
Speaking on expectations for the MPC, and the likely direction of their deliberation, an analyst predicted that the committee is likely to retain all rates and ratios, to watch the impact of the previous increase on the economy.
Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr Chijioke Ekechukwu, said: “It took the MPC a very long time before they increased the MPR to 13 per cent from 11.5 per cent·
“This was not because they didn’t need to increase, even as the inflationary trend and threats were putting pressure on them to increase, but because, increasing the rates would dovetail into high-interest rates by deposit money banks, which would ultimately increase the inflation rate, which CBN was battling to stabilize.”
On his part, Managing Director/Chief Executive, SD&D Capital Management Limited, Mr Idakolo Gbolade, said the committee would give attention to fighting inflation as it continues to destabilise the economy as well as address foreign exchange shortages.
“The major reason for increasing the MPR rate to 13 per cent has not abated, inflation has not shown signs of slowing down, food inflation is majorly on the increase coupled with the Russia- Ukraine war, which could greatly affect wheat prices that will lead to increase in the cost of staples like bread to name a few.”
But Chief Executive Officer of Parthian Partners Limited, Oluseye Olosoga, described the debate about MPC operation as fruitless and of little relevance to the economy. “The impact of MPC on the economy are very marginal. We should stop using knowledge from the West to drive our economy. The man on the street does not feel the impact of the decisions of the MPC. When he wants to borrow from the banks, he would probably still pay the same interest even if MPC reduces the benchmark rate,” Olusoga said during an interview at his company’s 10th anniversary at the weekend.
Prof. Owoh holds a more dismissive perspective. He believes that MPC is completely disconnected from the reality of the economy and that its meetings have become unnecessary rituals that only compound the economic challenges they are met to solve.
IF there was any hint the aggressive interest rate review would slow down, recent data suggest otherwise. First, the United States labour market remains bullish, adding 372,000 jobs in June. Jerome Powell (Chair of the Fed), who has been accused of inducing recession, knows prices would not slow down as long as workers are in a position of strength to negotiate wages. That suggests a more aggressive rate hike that would achieve a ‘healthier’ unemployment rate. The inflation rate, which some economists suggested had peaked, surged in June again setting a new high at 9.1 per cent, which is over seven per cent higher than the two per cent target. Though gas prices have slowed down in the past month, some analysts believe labour and CPI data have given the Fed sufficient headroom to raise interest rates higher with some suggesting the US economy could be added an extra 100 basic points on July 29 when the Federal Open Market Committee (FOMC), an arm of the Fed, will conclude its next crucial rate-fixing meeting. The U.S. climbing interest rate means capital from different parts of the world would continue to take flight, the dollar, which is emerging as the only safe-haven with gold also buckling. The World Bank had warned that economies, especially those with weak fiscal positions, could be hit hard by the restrictive monetary environment if they did not act fast. Nigeria has thrown the first stone as different countries take on inflation. Source: The Guardian Image source: Pixabay
