TUE, 24 MAY, 2022-theGBJournal| ‘’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,’’ says the Centre for Promotion of Private Enterprise, a Nigerian think-tank with focus on the promotion, protection and the advancement of Private Enterprise in the Nigerian economy.
CPPE noted that the primary mandate of the CBN is price stability.
According to the think-tank, 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. But whether this would significantly impact on the inflation is a different matter. 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.’’
CPPE observed that 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.
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 the recent 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.’’
CPPE pointed to some of the key drivers of inflation in the country, viz, Liquidity challenges in the forex market affecting access to manufacturing and other inputs, supply chain disruptions resulting initially from the pandemic, and now deepened by the Russian – Ukraine conflict, security concerns disrupting agricultural output, climate change effects on agricultural production, structural constraints affecting productivity in the agricultural value chain and manufacturing, high transportation costs affecting distribution costs across the country. This is also reflected in the huge differential between farm gate prices and market prices.
There is also the case of high and increasing energy cost, monetization of fiscal deficit [CBN financing of deficit] which is highly inflationary because of the liquidity injection effects on the economy as well as high transactions costs at the nations ports increases production and operating costs of businesses, high import duty on intermediate goods and raw materials and aggressive revenue drive by government agencies, taking a toll on cost of production.
CPPE said, to curb the current inflationary pressure government need to quickly address the security concerns causing disruption to agricultural activities, reform the foreign exchange market to stabilize the exchange rate, reduce volatility and stimulate forex inflows.
It also recommended addressing the forex liquidity issues through appropriate policy measures, fixing the structural problems to boost productivity and competitiveness of domestic firms, addressing the challenge of high transportation and logistics cost and reducing the fiscal deficit monetization to minimize incidence of high-powered money in the economy.
The eleven point recommendation also include managing climate change consequences to reduce flooding and desertification, ensure the restoration of normalcy and good order at the nations ports to reduce transaction costs, reducing 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 as well as addressing concerns around high energy cost and creating an investment friendly tax environment to boost investments and output in the economy.
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