The Central Bank of Nigeria (CBN) is continuing its fight against inflation with aggressive monetary policy measures. While central banks in the U.S., U.K., and the European Union have declared victory over inflation, the battle persists in Nigeria, where inflationary pressures remain a major concern. In response, the CBN’s Monetary Policy Committee (MPC) unanimously decided to raise the Monetary Policy Rate (MPR) by 50 basis points, from 26.75% to 27.25%, on September 24, 2024. The move reflects Nigeria’s ongoing struggle to stabilize its economy and manage inflation, which has been driven by a variety of domestic and international factors.

A Trend of Rate Hikes

This latest rate increase marks the fifth such move in the last eight months, bringing the cumulative hike to an extraordinary 850 basis points. Since the beginning of 2024, the CBN has adopted a more aggressive stance on monetary tightening in an effort to tame surging inflation and stabilize the Naira. Under the leadership of Governor Olayemi Cardoso, the CBN has made clear its commitment to tackling inflation through sustained policy measures, despite the adverse effects these policies may have on borrowing costs for businesses and consumers.

Along with the interest rate hike, the CBN also raised the Cash Reserve Ratio (CRR) for commercial banks by 5%, from 45% to 50%, and for merchant banks by 2%, from 14% to 16%. These adjustments are intended to tighten liquidity in the banking sector, reducing the amount of money in circulation and thus curbing inflationary pressures. The liquidity ratio, however, remained unchanged at 30%, while the asymmetric corridor around the MPR stayed at +500/-100 basis points.

Nigeria’s Inflation Challenge

Inflation in Nigeria has been a persistent issue, driven by a combination of global supply chain disruptions, domestic policy challenges, and structural economic problems. Food inflation, in particular, has been a major contributor to headline inflation, impacting the cost of living for ordinary Nigerians. According to Governor Cardoso, the latest rate hike is aimed at sustaining the downward trend in price levels, managing risks to inflation, stabilizing the exchange rate, and safeguarding the country’s banking system.

Since the previous MPR adjustment in July, Nigeria has witnessed some progress in curbing inflation. Headline inflation declined by 2.04% over the two months following the rate hike, while food inflation also dropped by 3.35%. However, the challenges remain significant, especially given the risks posed by flooding, energy price hikes, the scarcity of Premium Motor Spirit (PMS), and security concerns in farming communities.

Core inflation, which excludes volatile items like food and energy, has seen a slight increase of 0.18% during the same period. The rise in core inflation is largely attributed to higher energy costs, which have become a source of concern for the CBN’s MPC. Governor Cardoso expressed that the persistent rise in core inflation poses severe risks and signals ongoing inflationary pressures.

Exchange Rate Stabilization

While inflation has been on a gradual decline, Nigeria’s exchange rate has also seen positive developments in recent months. Between the end of July and August, the Naira appreciated by ₦6, strengthening from ₦1,610 per U.S. dollar to ₦1,604. This period of reduced volatility and increased stability in the foreign exchange market is a crucial indicator that the CBN’s monetary policy efforts are having a positive impact on the economy.

The exchange rate’s stabilization is essential for Nigeria’s external balance, as it helps manage foreign reserves and supports trade flows. Governor Cardoso has emphasized that attracting foreign exchange inflows is a key goal of the CBN’s tightening measures. By raising interest rates, the central bank aims to offer better real returns to investors, incentivizing them to hold the Naira and invest in the Nigerian economy.

Economic Recovery and the Role of Fiscal Policy

Despite the tightening monetary environment, Nigeria’s economy has shown signs of recovery. The CBN’s Purchasing Manager Index (PMI) for business activities indicated an expansion in economic activity, rising from 48.8 points in January to 50.2 points in August. This transition from contraction to expansion suggests that businesses have adapted to recent fiscal and monetary policy adjustments, allowing for a gradual rebound in economic performance.

However, the positive trajectory in inflation control and exchange rate stability could be offset by fiscal challenges, particularly the rising cost of PMS. In September, the price of PMS surged from ₦617 to ₦897, placing additional strain on households and businesses. Governor Cardoso acknowledged the potential for fiscal policies, such as fuel price hikes, to undermine the gains made in curbing inflation.

Nonetheless, the MPC remains optimistic that future developments, particularly the operation of the Dangote Refinery, will alleviate some of these pressures. The refinery’s expected output is anticipated to reduce transportation costs and ease food price inflation in the short and medium term. Additionally, it could reduce Nigeria’s reliance on imported refined petroleum products, thereby lowering foreign exchange demand and improving the country’s external reserves.

Long-Term Outlook and Challenges

While the CBN’s recent actions have contributed to a more stable economic environment, the road ahead remains challenging. One of the key factors influencing Nigeria’s economic outlook is its vulnerability to external shocks, particularly fluctuations in global energy prices. Nigeria’s reliance on oil exports for foreign exchange earnings means that any significant changes in the global oil market can have a direct impact on the country’s fiscal and monetary stability.

In addition, structural issues such as weak infrastructure, security challenges, and the underperformance of key sectors like agriculture and manufacturing continue to pose significant risks to sustained economic growth. The agricultural sector, which accounts for a large portion of Nigeria’s GDP and employs millions of people, has been particularly affected by security concerns, including armed conflict and banditry in rural areas. These issues have hampered farming activities, leading to food supply disruptions and upward pressure on food prices.

The government’s ability to address these structural challenges will be crucial in determining the success of the CBN’s monetary policy measures. While the central bank can continue to raise interest rates and tighten liquidity to combat inflation, these efforts may be undermined if the underlying issues affecting the economy are not addressed.

Balancing Growth and Inflation

The CBN’s decision to raise interest rates reflects the delicate balancing act it faces between controlling inflation and supporting economic growth. Higher interest rates can help curb inflation by reducing consumer spending and borrowing, but they can also slow economic activity by making credit more expensive for businesses and individuals. Striking the right balance between these competing objectives is a challenge that central banks around the world face, and Nigeria is no exception.

Governor Cardoso has stressed the importance of maintaining a cautious but proactive approach to monetary policy. The central bank’s focus on stabilizing the exchange rate, managing inflationary pressures, and supporting the banking sector indicates a commitment to long-term economic stability. However, the success of these efforts will depend on the government’s ability to implement complementary fiscal policies that address the structural issues facing the economy.

In conclusion, the CBN’s latest rate hike is part of a broader strategy to combat inflation, stabilize the Naira, and support Nigeria’s economic recovery. While progress has been made, significant challenges remain, particularly in the areas of food inflation, energy prices, and fiscal policy. As Nigeria navigates this complex economic landscape, the actions of both the central bank and the government will be critical in determining the country’s path forward.

photo source: Google

By: Montel Kamau

Serrari Financial Analyst

26th September, 2024