Introduction
Between 23rd and 24th May 2022, the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) met and one of the key decisions taken by the MPC was to retain the Monetary Policy Rate (MPR) at 13.0%. The MPR is the rate at which the CBN lends to the commercial banks and in turn influences the rate at which banks lend to their customers. The MPR is used by central banks across the world as a monetary policy tool to control inflation, boost production, stimulate and stabilise the economy amongst other measures.
One of the economic indices that the MPR is used to stabilise is inflation which is a condition of rising prices of goods and services. If the inflation is high, the central bank increases the MPR which then makes it more expensive to borrow from the banks and consumers therefore spend less. Also, the interest offered on savings by the banks becomes higher and that attracts individuals/corporates to save instead of consumption. With less demand, the pressure on prices is lifted and inflation is contained.
The scenario described above is used to control DEMAND-PULL inflation where aggregate demand exceeds the supply of goods and services available to consumers. A higher MPR therefore curtails the demand and eases inflation.
But Nigeria’s inflation is COST-PUSH which will not respond to MPR increase measures. This is the tragedy of the recent CBN’s increase of MPR by 150 basis points from 11.5% to 13.0%. What the CBN has done is akin to injecting sniper or gamalin into an ailing body! A cost-push inflation is not resultant from demand which an increased MPR curbs, but from increased costs to producers who then pass these additional costs to consumers through increasing prices. So even if demand remains same but producers are experiencing rising costs, prices of goods and services will continue to increase as the producers recoup these rising input costs.
Even a student of economics will know that Nigeria’s inflation is cost-push arising from increased producer costs due to the following factors:
1 Adverse exchange rate – an importer who brought in a consumer product costing $1,000 when naira was N150 to a dollar would have paid N150,000 and if he added profit of 20% the selling price will be N180,000. The same product today at the same $1,000 will now cost N610,000 to import without even taking profit into account yet (naira now N610 to a dollar). This price increase has nothing to do with demand but everything to do with the import cost. Meanwhile the CBN is busy fighting this increased price with increase in MPR which is meant to curb demand! The CBN is administering a medicine for malaria when the economy is sick with cancer!
2 Diesel costs – the fuel used in the manufacturing sector has increased from N250/litre to N850 today. That’s an increase of over 200%. Manufacturers and service providers are increasing prices of goods and services to recoup these increased fuel costs. The prices are not rising due to demand! It is unfortunate the CBN doesn’t know!
3 War in Ukraine – the war in Ukraine has distorted the global supply chain of key inputs like wheat to the manufacturing sector. The increased costs must be passed on into increased prices of goods and services like bread. It is nothing to do with demand which unfortunately the CBN fails to diagnose!
There are other cost pressures like security, logistics, wages etc. that are pressuring producers to increase prices and demand is not the cause! The CBN policy targeted at demand is therefore ineffectual!
IMPLICATION OF INCREASED MPR TO 13.0%
Given that Nigeria’s inflation is cost-push, the implication of the CBN following sheepishly other global central banks to increase MPR to 13.0% are:
1 It makes borrowing more expensive so producers who should be increasing output and capacity to supply more to the economy are rather closing shop because they can no longer afford the prohibitive cost of financing their operations. The CBN is therefore sounding the death knell of the Nigerian economy instead of jumpstarting it to life.
2 Families are experiencing inelastic demand that does not respond to price movements. A father who must travel to his place of work everyday to put food on his family’s table will still travel even if the cost of transportation is increased. So even if the CBN increases the MPR to 50%, this father has no choice than to commute to work. What the CBN will end up doing by increasing MPR is to push this father increasingly into the poverty trap! The same applies to a mother who must buy garri to prepare eba for his family. Even if the cost of garri triples, she has no choice than to buy it, so her demand is inelastic regardless of whatever rate the CBN increases MPR to.
3 Nigeria’s unemployment rate hovers around 50% (one of the highest in the world) and even those who are in work are hardly paid and when paid the wages are not sufficient to take them home! Where therefore is the demand that the CBN thinks it can curb with increased MPR? The Nigerian Deposit Insurance Corporation (NDIC) says 99.4% of bank accounts in Nigeria contain less than N500,000! There is simply no demand! An increase in MPR is like the CBN administering medication for Alzheimer to someone who is not thinking well because of hunger! Death will be lurking by the corner which is the fate of Nigeria’s economy because all the increases in MPR instead of boosting the economy they are pushing it to the brink! The unemployment rate in the countries like the UK, US etc. whose central banks are increasing MPR hovers at less than 5% in comparison.
SOLUTIONS TO NIGERIA’S ECONOMIC CRISIS
Instead of using increased MPR as the monetary tool which does no good to the economy but rather strangulates it, what Nigeria needs to do to boost economic growth and development are:
1 Increase power supply from the current miserly 3GW to at least 40GW within the next 3-5 years. The UK is supplying 730GW to a population of 65 million people. India is supplying 400GW to 1.4 billion people. If Nigeria were to supply India power, we will be giving them 21GW! Electricity will boost domestic output which in turn will curb inflation!
2 The CBN must immediately stop issuing foreign exchange to importers of goods and services readily available in Nigeria such as school fees, medical tourism, mortgage, rent, holidays etc. to people to go and spend abroad. If these monies are spent in Nigeria, it will encourage local producers to produce more, and inflation will be arrested.
3 The Government must sell or lease the 4 comatose refineries immediately. This will end fuel price inflation through importation which in turn affects the prices of goods and services produced. This will be a more effective and sustainable way to curb inflation than increasing MPR.
4 Government must also tackle other structural issues such as insecurity which is affecting the agricultural sector leading to increased prices of food in the markets. More supply of food will manage inflation better than increased MPR by reducing the importation of food!
5 Reduce MPR to single digit so that the economy will be awash with cheap credit for producers to access to boost supply of goods and services, reduce unemployment and address exchange rate crisis through reduced importation. In comparison the UK bank rate was 0.5% all through COVID and it currently stands at 1%! check this against an ailing economy like Nigeria’s at 13.0%! Nigeria cannot survive which such high cost of credit!
6 Remove the CBN Governor who only understands politics and not policy! Nigeria must stop this practice of appointing commercial bankers are central bankers. Commercial banking and central banking require distinct skill sets. A central bank Governor with commercial banking pedigree will always think like a commercial banker – raise deposits and give loans! Central banking requires much more than this!
Conclusions:
The CBN must reverse the high MPR at 13.0% down to single digit because the dynamics of the Nigerian economy are different from other global economies who are now fighting inflation by increasing bank rates! Every doctor will advise against taking medication prescribed for another patient! Nigerian economy must not be force-fed with medication being adopted elsewhere in the world just for the sake of keeping up with the Joneses!
References:
https://www.cbn.gov.ng/monetarypolicy/decisions.asp
https://www.vanguardngr.com/2021/10/just-in-99-4-of-bank-accounts-contain-less-than-n500000-ndic/
https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2022/may-2022
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