Central Bank of Nigeria Monetary Policy Committee has said that the nation’s gross external reserves stood at $34.51 billion on February 20, 2024, compared with $32.23 billion at end-January 2024. The improvement was driven by reforms in the foreign exchange market and an increase in oil production amongst others. In the global economy, inflation is projected to continue to moderate in 2024, but could remain above the long-term objectives of several advanced economy central banks. Consequently, policy rates among this group of central banks are expected to remain high in the short to medium term. The Committee thus recognised the need to continue to put in place measures to boost investor confidence and to attract capital inflows. To this end, the Committee will continue to monitor developments in the global and domestic economies to ensure that inflationary and exchange rate pressures moderate in the near term.

Mr Olayemi Cardoso Governor, CBN conveyed the outcome of the Committee decisions. According to him “the Committee decided to further tighten monetary policy as follows: Raise the MPR by 400 basis points to 22.75 from 18.75 per cent; adjust the asymmetric corridor around the MPR to +100/-700 from +100/-300 basis points; raise the Cash Reserve Ratio from 32.5 per cent to 45.0 per cent; retain the Liquidity Ratio at 30 per cent. In a swift reaction the Centre for the Promotion of Private Enterprise said “the outcome of the Monetary Policy Committee [MPC]s meeting of 27^th February 2024 would hurt the real sector of the economy which is already contending with numerous macroeconomic challenges. The increase of Monetary Policy Rate [MPR] from 18.75% to 22.5%; 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.  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. 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 had 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 recognise that the primary mandate of the CBN is price stability, but numerous headwinds had 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. The surge in ways and means finance also makes the CBN a culprit in the inflation predicament over the past few years.   The hike in MPR or CRR would not change these variables. 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 debits by the apex bank.  The credit situation in the economy is already very tight, with lending rate ranging between 25 -30%.

“The Committee’s decisions were centred on the current inflationary and exchange rate pressures, projected inflation, and rising inflation expectations. Members were concerned about the persistent rise in the level of inflation and emphasised the Committee’s commitment to reverse the trend as the balance of risk leaned towards rising inflation. The Committee, however, acknowledged the trade-off between the pursuit of output growth and taming inflation but was convinced that an enduring output expansion is possible only in an environment of low and stable inflation. Members noted the decision to transit to an inflation targeting framework as essential to addressing the persistence of inflationary pressures in the economy and commended the fiscal authority for their invaluable support.

“In the opinion of the Committee, the options available for decision was to either hold or hike the policy rate to offset the persisting inflationary pressure. Considering the option of a hold policy, the evidence revealed that previous policy rate hikes have slowed the rise in inflationary pressure but not to a desirable extent. Members considered various scenarios of hold and hike, and concluded that, inflation could become more persistent in the medium-term and thus pose more regulatory challenges if not effectively anchored. The balance of the argument thus leaned convincingly in favour of a significant policy rate hike to drive down inflation substantially. The MPC also deliberated extensively on various distortions in the foreign exchange market including the activities of speculators, putting upward pressure on the exchange rate with high pass-through to inflation. 

“Members were, however, convinced that the ongoing reforms in the foreign exchange market will yield the desired outcome in the short to medium term. Some of these reforms include: the unification of the foreign exchange market; promotion of a willing buyer willing seller market; removal of all limits on margins for IMTO remittances; introduction of a two-way quote system and the broad reforms inthe BDC segment of the market to restore stability, enhance transparency, boost supply, and promote price discovery in the Nigeria Autonomous Foreign Exchange Market (NAFEM). The Committee reviewed the key financial indicators of the banking system and noted that the system remained stable. To further ensure the stability of the banking system, the MPC called on the Bank to increase system buffers by recapitalising the banks to improve resilience against potential risks. Members further enjoined the Bank to strengthen surveillance and compliance regarding its earlier guidance on the application of foreign exchange revaluation gains.

“The Committee identified non-monetary factors driving inflation such as the persisting insecurity and infrastructural deficits and noted the role of fiscal policy in addressing these shortfalls, while reiterating the commitment of monetary policy support. In this regard, the Committee applauded fiscal policy initiatives towards reducing the cost of living for ordinary Nigerians, including the ongoing efforts to improve food supply and provide mass transit CNG buses to ease the cost of transportation; and the civil service reforms to improve the efficiency of government amongst others”.

  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. The transmission effects of monetary policy on the Nigeria economy are still very weak.   In the Nigerian context, price levels are not interest sensitive.  Supply side issues are much more profound drivers of inflation.   The new dramatic increase in MPR to 22.5% 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 vey challenging operating conditions.  The equities market may also be adversely impacted by the hike. It is thus imperative for the CBN to accelerate the process of increased capitalisation of the development finance institutions to create a concessionary financing window for the real sector and the small businesses.