- Nigeria’s Central Bank Monetary Policy Committee recently increased the interest rate to tackle inflation
- The approach seems to have not yielded the desired results as inflation has jumped to 34.19 per cent as of June 2024 while hurting the manufacturing sector
- Nigerians say the CBN should apply other approaches to tame inflation other than ‘textbook economics’
At its 296th Monetary Policy Committee (MPC) meeting in Abuja on Tuesday, July 23, the Central Bank of Nigeria (CBN) decided to increase the Monetary Policy Rate (MPR) by 50 basis points to 26.75 per cent from the May rate of 26.25 per cent.
This marks the fourth consecutive increase of the MPR by the Olayemi Cardoso-led MPC since February 2024 when the rate was 22.75 per cent.
The MPC, however, retained the Cash Reserve Ratio (CRR) at 45 per cent for deposit money banks (DMBs), 14 per cent for merchant banks and retained the Liquidity Ratio (LR) at 30 per cent.
CBN governor, Olayemi Cardoso, who made the announcement, added that the MPC adjusted the asymmetric corridor around the MPR to +500/-100 from +100/-300 basis points.
These measures are part of the apex bank’s efforts to rein in the intractable inflation in the country that surged to a new 28-year high of 34.19 percent in June 2024, which is 0.24 percentage points higher than the 33.95 per cent recorded in May 2024.
Also, food inflation increased to 40.87 per cent in June 2024 from 40.66 per cent in May 2024, according to the National Bureau of State Statistics (NBS).
Cardoso said the committee considered the effect of rising prices on households and businesses in making the decisions on the MPR and noted that it was committed to adopting necessary measures to rein in inflation.
He said, “Going forward, we must ensure that we are able to craft policies that are sustainable with the long term in view. Such policies must take into consideration inclusiveness. The implementing process must be robust, and that is where the institutions come in. They have to go hand-in-hand.
“In the short term, we might find that some of the policies being implemented may appear stringent, but I can assure you that in the medium and long run, definitely, they will put us on the path of sustainability.
“Our policies are beginning to cascade down bit by bit. They are moving in a relatively more positive trajectory.
“Two areas that pose a challenge are food inflation and foreign exchange. The MPC noticed the moves by the fiscal side taking certain policies that help to moderate food inflation and we are hopeful and encouraged.”
CBN's Inflation-tackling policies have not yielded desired results
Cardoso has severally said the MPC will keep hiking interest rates to tame inflation. The efforts of the Cardoso-led CBN to tackle inflation have proved ineffective though he said the apex bank’s policies and strategies have been instrumental in keeping the inflation rate below 50 per cent month-on-month (m-o-m) between February and May 2024. The impacts of these strategies are, however, lost on Nigerians as prices of goods and services have skyrocketed within the period.
A timeline of inflation within the period showed that the rate soared from 29.90 per cent in January to 33.95 per cent in May 2024, which is a 28-year high, driven by higher food and transport costs according to data from the National Bureau of Statistics (NBS).
The rate increased from 29.90 per cent in January to 31.70 per cent in February 2024. This represents a 1.80 per cent increase month-on-month and a year-on-year increase of 9.79 per cent from the 21.91 per cent recorded in February 2023.
In March 2024, the inflation rate increased to 33.20 per cent, which is a 1.5 per cent increase compared to the 31.70 per cent recorded in February. It further increased by 0.49 per cent to 33.69 per cent in April 2024.
The May 2024 inflation rate saw a 0.26 per cent increase from 33.69 per cent in April to 33.95 per cent, the highest in 28 years. It maintained the upward trend in June, rising to a new 28-year high of 34.19 percent.
High interest rate threatens real sector of economy
Higher interest rates pose a threat to all sectors of the economy, especially the real sector, which most of the time needs bank loans and other avenues of credit to expand operations and drive growth.
A high interest rate regime means higher costs for the production of goods and consumers will bear the pass-through effects in the form of higher prices for the purchase of goods.
In early July, Nigerian businessman, Aliko Dangote, lamented the impact of a nearly 30 per cent interest rate hike on businesses, saying it would stifle growth and hinder job creation.
Dangote had called on the government to protect local industries as policies such as interest rate hikes could be detrimental to economic growth.
He said, “Right now, at 30 per cent, there is no way anybody can create jobs. If the interest rate is 30 per cent, there would not be any job creation because we are actually stifling growth.
“So, interest rates can remain at 30 per cent but then no growth will happen unless that interest rate goes down.
“I am convinced that when government policy becomes more supportive and protective, investors will be more willing to collaborate and partner with the government in resolving other challenges such as infrastructure deficits, market stabilities and macroeconomic issues such as inflation and foreign exchange volatilities.”
Import duty suspension, subsidised agricultural loans are alternatives
Speaking with TheRadar, Ikemesit Effiong, the Head of Research at SBM Intelligence, called for a suspension or reduction in import duty charges, harmonisation of the many taxes in the country and subsidisation of food for low-income earners.
Recall that these were some of the recommendations of the Presidential Fiscal Policy and Tax Reforms Committee in May, which made a case for the taxes and levies collected by the three tiers of government be streamlined and harmonised into eight headings.
Chairman of the committee, Taiwo Oyedele, said the recommendation is to make tax administration modern, simple, adaptive and enable economic growth.
Recall also that the Federal Government recently announced a 150-day import duty suspension on staple food as well as dispatched 740 rice trucks to states at 20 trucks for each of the 36 states and the Federal Capital Territory, Abuja.
Effiong said, “In the very short term, we can do things like either reduce or temporarily suspend duties on imports and exports. It incentivises Nigerian companies and producers to produce things for the overseas market, earn in foreign exchange, repatriate it to Nigeria and then they have more naira to invest in their business, to pay salaries, to pay taxes, etc.
“With respect to imports, a temporary suspension or a reduction in the level of import duties will do is that it can empower importers to at least bring in food. When the food supply is increased and it is predictable and it is not subject to variations and changes, then economic actors, both on the supply-producer side and on the consumer side, can feel confident enough in their ability to get goods. It will reduce the pressure on food prices and food prices will come down.”
Textbook economics not working – Netizens
Taking to X, some Nigerians reacted to the interest rate hike approach of the CBN to curb inflation. They noted that the Nigerian economy has defied ‘textbook economics’ and urged the apex bank and the Federal Government to adopt other approaches like subsidised agricultural loans and immediate implementation of the import duty suspension on certain consumables.
@The_Barr_OluT tweeted, “There are other approaches to fighting inflation since this interest rate method is not working. Now, Tinubu release a policy that the cost import on some consumables should be reduced. This is an attempt to fight another cause of inflation, ‘demand-pull inflation,’ which simply means that the reason price of goods has increased is because cost of producing it has increased.
“Now this Tinubu’s tariff reduction is only on specified goods and hasn’t taken effect yet but the writer below and me likewise believe it might be a better approach than the interest rate increase.
“There are also other approaches that could incentivise local production of food to reduce food prices like agricultural loans, etc. (Loan to normal businesses at 26.75 per cent but to farmers at 15 per cent) among others. The entire point is that this interest rate method does not seem to be working but the CBN is keeping at it!”
@_namedNameless wrote, “Increasing the cost of capital each month is obviously not working. As a matter of fact, it’s making life even tougher for common Nigerians. Banks and OFIs will adjust interest rates on existing debts for both corporate and individual debtors as well, which doesn’t bode well. The busineses particularly, will only shift this burden to the consumers (who are already poor). It always comes back to bite the poor.
“Other approaches have to be taken more seriously to combat our inflation crisis. We need food supply to drive down the cost of food which is at 40.8 per cent inflation rate, according to NBS.
“Import tariffs on specified consumables are supposed to have gone down by now after Tinubu’s policy statement to that effect, which means, cost should go down soon enough and prices could likely drop a bit. But honestly, this textbook approach of raising the interest rate every month isn’t working.”
@EmodiOnyinye said, “Nigerian economics is different. It’s unfortunate but it’s just the fact. The solution to our economic woes is not in textbook pages & this is one of the major issues we have. These policy makers are all textbook bred & the ones smart enough to break free all have criminal minds.”
FG suspends import duties, taxes on essential food items to address inflation
Meanwhile, TheRadar reported that the Federal Government has announced the suspension of import duties and taxes on essential food items to make them affordable and to address food inflation.
The suspension was disclosed by the Comptroller General of the Nigeria Customs Service (NCS), Bashir Adewale Adeniyi, on Tuesday, July 30, who reiterated the Federal Government’s commitment to implementing import duties and tax suspension seamlessly to tame food inflation and combat hunger in the country.
