Nigerian Think-Tank Tells Apex Financial Institution What to do to Keep Inflation Down
A leading Nigerian think-tank, Agora Policy, has highlighted measures to be taken to halt the current soaring inflation in the country.
The organisation, in its latest report released a copy of which was made available to the NPO Reports, said the economy has been hit by serious challenge as a result of what it reasoned were combination of many factors.
Agora Policy, a group founded by Waziri Adio, former Executive Secretary of the Nigerian Extractive Industry Transparency Initiative (NEITI) noted that the report became necessary because of what it called “high and rising inflation which hit an 18-year high of 22.41% in May.” Agreeing that inflation is a challenge to any economy, the report said “inflation is especially worrying for food which, at nearly 25%, means that the poorest who as at 2019 already spent roughly 60% of their incomes on food, are in a very difficult position.”
The report blamed what it called the Central Bank of Nigeria’s “Unconventional policy route” for the economic challenge. It said that the CBN misunderstood its roles and powers which it said has led to some of the crisis. “As long as inflation remains high, every other objective, be it the quest for exchange rate stability or the president’s agenda for increased cheap lending to MSMEs, will be much more difficult to achieve. The CBN needs to remember that its primary monetary policy objective is to keep inflation in check,” the report reads.
“Given that inflation is currently much higher than ideal, the direction of monetary policy has to be to tighten or reduce the growth of money supply. This also means that interest rates will likely have to go up. How far up? At least to the point where “real” interest rates are no longer negative, but maybe even higher.
“These actions to reduce the growth of money supply and increase interest rates are likely to be complicated by all the underhand administrative measures which were put in place to force rates down or to limit money supply growth through the back door.”
Saying that the CBN’s Monetary Policy Committee has been rendered ineffectual, the report said the monetary policy rate no longer influences interest rates either for government securities or at the banks. “The unwinding of the ad-hoc cash reserve ratio (CRR) policy, which means money refunded to banks, will also have unintended effects if not managed. The CBN will need to unwind most of these ad-hoc measures,” the think tank said.
“Given the misdirection by the CBN over the last few years, there may be a tendency for the government to want to take closer control of monetary policy.
“This will likely be counterproductive as it has been demonstrated here in Nigeria and in other countries where governments tend to want to use monetary policy for other non-inflation objectives. Which is the underlying problem that the CBN faces today.”
The report also indicted the suspended Governor of CBN, Mr. Godwin Emefiele, who it said adopted an option where money supply through its direct interventions instead of going through the financial sector.
“The CBN under his direction, changed from what had been a relatively successful decade of limiting money supply growth which resulted in single digit inflation, to increasing the growth of money supply. As Figure 2 shows, regardless of what else was happening in the economy, what is clear is that there was a change of trajectory and money supply started to increase under his watch. Money supply was of course completely under the control of the CBN. As we remember from our crash course in monetary policy, more money supply in a similar-sized real economy, simply means higher inflation.”
The report also blamed the CBN for engaging in direct lending to the Federal Government which by the end of the tenure of President Muhammadu Buhari, had led to a N22.7tn in outstanding debt. The report this amounted to about 40% of the total money supply by the April of this year. Proffering solutions, the policy said CBN must be reminded that its major responsibility is to keep inflation under control.
It said, “The starting point is for the CBN (and given the current circumstances the executive also) to recognise the scale of the inflation challenge and the importance of getting inflation under control. As long as inflation remains high, every other objective, be it the quest for exchange rate stability or the president’s agenda for increased cheap lending to MSMEs, will be much more difficult to achieve. The CBN needs to remember that its primary monetary policy objective is to keep inflation in check.”