…As CBN Raise Interest Rate
An economist and Chief Executive Officer, CEO, of Center For The Promotion Of Private Enterprise, CPPE, has called on Government to urgently address the security concerns causing disruption to agricultural activities.
Yusuf, also called for immediate reform of the foreign exchange market to stabilize the exchange rate, reduce volatility and stimulate forex inflows.
This is coming as the Central Bank of Nigeria raised its benchmark interest rate to 13% from 11.5%, Governor Godwin Emefiele said on Tuesday, surprising analysts who had been expecting the Monetary Policy Committee (MPC) to keep the rate unchanged.
Emefiele told a news briefing the rate hike was necessary to tame inflation, which quickened to 16.82% in April, its highest in eight months amid a fragile economic recovery.
But Yusuf noted that the outcome of the MPC meeting of 24th May 2022 was not unexpected having regard to the intense inflationary pressures, the increasing risks to price stability and the policy tightening trend by Central Banks globally.
The primary mandate of the CBN is price stability.
Numerous headwinds had posed significant risks to this critical CBN objective. Some of these include the surge in commodity prices and impact on energy cost, spike in domestic liquidity from electioneering related spending and global supply chain disruptions.
The hike in MPR by 150 basis points to 13% by the MPC is therefore understandable, he opined.
But whether this would significantly impact on the inflation is a different matter, he added.
“Already, bank lending has been constrained by the high CRR [many operators in the sector claim that effective CRR is as high as 50% or more for many banks], the discretionary debits by the apex bank, the 65% Loan to Deposit Ratio [LDR] and liquidity ratio of 30%. Lending situation in the economy is already very tight.
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 verychallenging, and the informal sector accounts for close to 50% of the economy. ” he said.
The transmission effects of monetary policy on the economy is therefore still very weak. In the Nigerian context, price levels are not interest sensitive. Supply side issues are much more profound drivers of inflation.
“What therecent rate hike means for the economy is that the cost of credit to the few beneficiaries of the bank credits will increase which will impact their operating costs, prices of their products and profit margins. Investors in the fixed income instruments may also benefit from the hike. There would be some adverse effects on the equities market.” Yusuf warned.
He further informed government that to curb the current inflationary pressure it should also address forex liquidity issues through appropriate policy measures, fix the structural problems to boost productivity and competitiveness of domestic firms.
Other suggestions he made included addressing the challenge of high transportation and logistics cost, reduce fiscal deficit monetization to minimize incidence of high-powered money in the economy, manage climate change consequences to reduce flooding and desertification and ensure the restoration of normalcy and good order at the nations ports to reduce transaction costs.
In addition he called for reduction of import duty on intermediate products and raw materials for industries to reduce production costs, especially in the light of the sharp depreciation in the exchange rate, resolve concerns around high energy cost and create an investment friendly tax environment to boost investments and output in the economy.
Meanwhile, Food and energy prices are rising in Africa’s most populous country after Russia’s invasion of Ukraine pushed up oil prices and disrupted supplies of commodities like corn and wheat.
Emefiele said six members of the MPC voted to increase the main lending rate by 150 basis points, four of them by 100 basis points and one by 50 basis points.
It was the biggest rate hike since 2016 when the central bank increased rates by 200 basis points.
“(MPC members) felt that tightening will help rein in inflation before it assumes a galloping trend,” Emefiele said.
“The committee decided to raise monetary policy rate for the first time in two and a half years to rein in the current rise in inflation as members were of the view that the continued uptrend may adversely impact growth.”
The rate hike sent the yield on Nigeria’s longest 30-year bond soaring 75 basis points to 13.8%, traders said.
Razia Khan, chief economist for Africa and the Middle East at Standard Chartered, said the rate increase raised questions about whether this could be a precursor to a change in the central bank’s policy on foreign exchange.
“This could be the most important signal yet of eventual FX policy intentions … but we will not really know until we see whether and how much market rates reprice,” she said.
Tightening policy could help moderate domestic borrowing by the government, which has seen the amount it spends on servicing its debt increase significantly in recent times, said Emefiele.
Emefiele, said the economy was expected to expand 3.25% this year, lower than the federal government’s projection of 4.2% growth.