Rising inflation has become a global phenomenon, prompting many central banks to cage the monster by increasing interest rates. But the Central Bank of Nigeria (CBN’s) decision to toe a same line was not well received by real sector operators and financial market experts who warned that monetary policy rates are often insufficient to contain Nigeria’s largely ‘imported inflation. What is urgently needed to tame the scourge is a bouquet of robust policy measures and strategies that can address the underlying drivers of inflation in the country. Assistant Editors CHIKODI OKEREOCHA and OKWY IROEGBU-CHIKEZIE report
A spectre hunts the global economy, including Nigeria’s – the spectre of surging inflation. It’s been manifesting in skyrocketing food and energy prices, which have reached levels unseen for decades, prompting swift response by many central banks across the world by way of increasing interest rates to crush the outbreak.
For instance, the European Central Bank (ECB) has raised interest rates across the eurozone by a record margin to combat soaring inflation that has reached double figures in some of the currency bloc’s 19-member countries. The ECB announced its first increase in rates in 11 years, raising its key benchmarks by an unprecedented 0.75 percentage point to 1.25 per cent, with ECB President Christine Lagarde indicating the Bank’s readiness to announce further rate hikes to tackle high inflation and bring it down to its 2 per cent target. This followed a similar increase by the United States Federal Reserve, which has been the most aggressive with its interest rate hikes, increasing from 0.08 per cent in January 2022 to 3.08 per cent at the end of September this year, for instance. In Africa, Ghana and South Africa have also increased rates.
But the decision of the Central Bank of Nigeria (CBN) to borrow a leaf from other monetary authorities across the world and hike rates in a bid to push back inflation did not resonate well with private sector operators and financial market experts across diverse sectors. They argued that hike in rates were insufficient to contain inflation, pointing out that Nigeria’s depressing inflationary condition was the result of multiple factors, and that relying just on monetary policy to restrain its unabated growth may be ineffective as opposed to producing the desired outcome.
Nigerians and business operators across all sectors, particularly manufacturers, have been agonising over Nigeria’s soaring inflation rate and its attendant skyrocketing cost of living and running businesses.
Inflation in Africa’s largest and most populous economy has been on the upswing, rising from 20.52 per cent in August to 20.77 per cent in September, this year. This was 4.14 per cent points higher than the rate recorded in September 2021, which was 16.63 per cent. The Statistician-General of the National Bureau of Statistics (NBS), Prince Semiu Adeyemi, said the latest spike in inflation rate was driven by “interruption in the food supply chain, the influence of domestic currency depreciation on the cost of importation, and a general increase in the cost of production.”
Inflation also surged 17-year-high from 19.64 per cent in the month of July to 20.52 per cent in August, the highest since September 2005. It was also the seventh consecutive monthly increase since February this year, indicating a 3.52 per cent increase when compared to the August 2021 inflation rate of 17.01 per cent. It was actually in response to the August 2022 inflation report that the CBN’s Monetary Policy Committee (MPC) raised the benchmark interest rate from 14 to 15.5 per cent and the Cash Reserve Ratio (CRR), which means the share of a bank’s total customer deposit kept with the central bank as cash, from 22.5 to 32.5 per cent, to mop up liquidity and tame inflationary pressure in Nigeria.
Justifying the move, CBN Governor Godwin Emefiele said inflation had exceeded the 20 per cent mark in August, fueling speculations that the CBN would further raise the rate. He also pointed out that the Bank’s research study has shown that once inflation trends above 13 per cent, it will retard growth. According to experts, inflation is the result of too much money chasing too few goods. Over the last several months, this has occurred amid a surge in demand and supply chain disruptions caused by the COVID-19 pandemic and worsened by Russia/Ukraine war. This is so because of the global dependence on fuel, essential foodstuffs and other goods imported from the Russian Federation and Ukraine. And the barrage of sanctions on Russia by the United States and other European countries forced a spike in most commodities prices, including energy prices (diesel, aviation fuel, kerosene and gas).
However, in an effort to combat inflation, central banks will raise their policy rate, which is the rate they charge commercial banks for loans or pay commercial banks for deposits. Commercial banks pass on a portion of these higher rates to their customers, which reduce the purchasing power of businesses and consumers. For example, it becomes more expensive to borrow money to buy a house or a car. Ultimately, interest rate hikes act to slow spending and encourage saving. This motivates companies to increase prices at a slower rate, or lower prices, to stimulate demand. With inflation rates hitting multi-decade highs in some countries, many central banks have announced interest rate hikes in a bid to bring inflation under control.
Orgnaised Private
Sector members kick
However, the CBN’s decision to apply interest rate hikes as a tool to rein in inflation did not enjoy a smooth sail, as members of the Organised Private Sector (OPS) refused to be swayed by the CBN governor’s explanations. While conceding that raising monetary policy rates was primarily a strategy to manage inflation, the OPS members argued, however, that it does not address the underlying causes of inflation. According to them, the underlying drivers of inflation include rising food costs caused by several variables, including the devaluation of the naira and the cost of energy, which has impacted production and transportation.
The Manufacturers Association of Nigeria (MAN) pushed this argument further when it said government’s excessive drive for internally generated revenue, increase in interest rate in the US; unsustainable and unpragmatic interventions in the forex market; the acute shortage of forex and unfriendly exchange rates were not only fueling inflation, but seriously depressing industrial production. MAN Director-General, Segun Ajayi-Kadir, in a statement made available to The Nation, expressed hope that the CBN will creatively go beyond the conventional monetary management system, “because global economic dynamics are changing and conventional measures may no longer be effective.”
In the light of the above, he recommended upscaling current efforts at improving the availability of development-oriented funds at single digit interest rate, prioritising industries, promoting a more robust production-centric forex management and intervention in official forex market. Ajayi-Kadir also pushed that priority attention be given to meeting forex requirement of the industries’ vital inputs that are not available locally to sustain and ramp up production, and intentionally promote monetary and fiscal policy fusion. “In other words, the CBN and the Federal Ministry of Finance, Budget & National Planning should jointly put complementary measures in place in support of domestic manufacturing,” he said.
MAN also wants emplaced a framework that will facilitate harmonious implementation of relevant policy guidelines aimed at boosting productivity. “Undoubtedly, the implementation of these measures will enable industries to remain in business, increase aggregate output, improve contribution to Gross Domestic Product (GDP) and ensure inclusive and sustainable economic growth,” the association noted.
That is not all. Ajayi-Kadir also said the future course of action to cage rising inflation should begin with further reduction of Nigeria’s reliance on imported products and raw materials, by encouraging local sourcing through a comprehensive and integrated incentivized system. The MAN boss, who noted that “Nigeria is largely bearing the brunt of imported inflation,” pushed for government to sustain effort at improving infrastructural developments and ensure they are economically driven. This, according to him, is to reduce susceptibility to externally-induced inflation, as adequate provision of infrastructure in strategic hubs reduces operation and logistics cost and promote competitiveness.
He further advised on the need to accelerate the process of ensuring sustainable local refining of petroleum products by reactivating those currently inactive, and also support the coming on stream of Dangote Refinery and issue licenses for new refineries. “This will clearly reduce the pressure on the foreign reserve and mitigate the vulnerability of the economy to the external supply shock that has resulted in energy crisis,” he said, adding that the oil and gas industry should be strategically positioned to benefit maximally from future interruptions in global supply that triggers increase in price of crude oil. “It is appalling that an oil-producing country like Nigeria is at a disadvantage at a time when global oil prices are rising,” Ajayi-Kadir charged, urging government to “strive to always meet the oil production quota set by the Organisation for Petroleum Exporting Countries (OPEC), increase oil revenue and reduce budget deficit that has worsened inflation.
The National President of the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Ide J. C. Udeagbala, feels no less embarrassed by Nigeria’s lack of capacity to refine petroleum products locally. He said the urgent need to fix the domestic refineries, which NACCIMA has continued to harp on at every press briefing, has never been this compelling. “We call on the government to renew focus on implementing policies that ensure that our country is energy sufficient, becomes a net exporter of petroleum products and eventually, electricity. We can start by taking a look at other developing countries in this space, such as Trinidad and Tobago, which has never had cause to carry out “turnaround maintenance” on their only refinery or revisiting crude oil to petroleum product swap arrangements,” Udeagbala said.
The NACCIMA chief told The Nation that the present global increase in fuel prices and the resultant increase in diesel prices have a direct impact on prices of goods produced with petroleum products. “Notably, increased transportation, manufacturing, and heating costs have indirect implications on the cost of goods. It is increasingly crucial for most manufacturing enterprises to consider energy cost efficiency and become more reliant on alternative energy for production,” he said.
Udeagbala noted that as a result of the war between Russia and Ukraine, the worldwide inflation rate has spiked, leading to increase in the price of oil and food, and making it difficult to afford necessities. “Nigeria’s dependence on these countries (Russia and Ukraine) for agricultural commodities such as grains and wheat for direct consumption and industrial commodity production has had a significant effect on food prices,” he said.
While linking the increase in inflation rate to several factors, including the high cost of raw materials, the devaluation of the naira, and the disruption of the supply chain caused by insecurity, among others, Udeagbala said he believes that “Nigeria is currently suffering stagflation rather than inflation.” The way out of the quagmire, he suggested, is to urgently address the pervasive insecurity across the country that has continued to impede agricultural activities and deter investments in agriculture in Nigeria’s food-producing regions, resulting in a decline in agricultural output.
Increase in interest rates portends worrisome consequences, says MAN
For MAN, the need for Nigeria’s monetary authorities to look beyond rate hikes to rein in inflation was necessary because “increase in the two monetary parameters, MPR and CRR, portends worrisome negative consequences for the economy and the manufacturing sector.” Ajayi-Kadir said, for instance, that the increase in the rates will force increase in cost of borrowing by manufacturers, further beyond the extant double-digit rate, which dis-incentivises new investments in the sector. He also said it will lead to increased factor costs, which feed into high product prices, making the sector uncompetitive.
Besides, high product prices, he said, will make patronage to plummet and lead to huge inventory of unsold manufactured products in the sector. The MAN DG added that high inventory of manufactured products, consequent upon the rate hike, will trigger reverse effect in the sector as manufacturing capacity utilization, production, employment, profit and tax contribution to national building will decline. He was emphatic that in consideration of the prevailing scenario around increase in interest rate and access to funds, tougher times are ahead for the productive sector. “Clearly, the increase in rates will rub-off negatively on other rates and dash the hope for a single digit lending rate for the productive sector,” Ajayi-Kadir said.
He also said the observed continuous contractionary monetary policy posture without complementary fiscal support may not effectively reduce the prevailing inflationary pressure on the economy. “This is not unconnected with the fact that the current increase in Consumer Price Index (CPI) as reported by the National Bureau of Statistics (NBS) is not largely driven by monetary phenomenon, as self-inflicted weak foreign exchange rate management can be linked to the pressure,” Ajayi-Kadir averred.
According to him, an experiential x-ray of the prevailing economic stance revealed that domestic output gap due to the inefficiency of the macroeconomy, unguided industry development, inclement and high-cost operating environment, exploitative regulatory ecosystem and some externalities are predominantly responsible for the rising inflation that the nation is experiencing.
Policy will harm businesses, worsen hardship on Nigerians, says NACCIMA
NACCIMA is no less worried over the negative consequences of rate hikes. The association said the policy will harm businesses, as the majority of Small and Medium Enterprises (SMEs) would begin to have less discretionary income because of increased interest payments, and this will reduce their capacity to invest, reinvest, and hire additional personnel. The NACCIMA Director-General, Olusola Obadimu, said due to higher interest rates, it would be more challenging for businesses to repay their loans, and the majority could be threatened with insolvency. “Consequently, the survival of most small and medium-sized businesses is threatened by the rising costs of capital and production, which result in an increase in the price of finished items,” he said.
According to him, the current state of the economy has severely diminished the production capability of majority of industries, with many enterprises already closing. He said the implementation of this new policy will severely harm small and medium-sized firms, which account for 91 per cent of all businesses in the country and employ about 60 per cent of the working population, since it would inevitably result in an increase in operating costs. His words: “As the cost of raw materials increases for firms, they are forced to raise prices regardless of demand as a result of inflation’s root causes. Attempts by the government to restrict the circulation of money would inevitably result in a rise in the price of products and consumables, as well as a decline in the standard of living.”
Obadimu said most employers of labour would continue to find it difficult to accede to the desires of their employees, as employees may request a raise. “If companies fail to maintain competitive salaries, they may face a labour shortage, which has been the case in the largest number of businesses in most industries in present Nigeria,” he stated.
NACCIMA also said the rate hike will increase the hardship of Nigerians. “In fact, and in a practical sense, the majority of the population has diminished purchasing power, while the percentage of individuals living at the base of the pyramid continues to rise,” Obadimu said. He, however, argued that CBN’s hike in policy rates was insufficient to contain inflation, pointing out that before voting on a policy, it was necessary for decision-makers to always study the policy’s dynamics from a holistic and contextual perspective.
While insisting that the persistent increase in interest rates may not be sufficient to reduce the inflation rate, NACCIMA said it was necessary to address the underlying cause of inflation, which is rising food costs caused by several variables, including the devaluation of the naira and the cost of energy. According to NACCIMA, the aforementioned variables have impacted production and transportation. Hence, attaining low inflation rates required that government must assure monetary stability, a continuous electricity supply, and security to promote inclusive economic growth. NACCIMA insisted that raising interest rates is never the best policy to contemplate in the current economic situation, as it is evident that there are other causes of the stunning levels of inflation. The encouraging approach to reduce the current rate of inflation, according to the association, was to conduct a comprehensive analysis of all the causes contributing to the inflation’s rising trend and to implement control measures that can halt their effects.
The Lagos Chamber of Commerce & Industry (LCCI) also weighed into the matter, with its President, Dr. Michael Olawale-Cole, insisting that rate hikes will not curb inflationary pressures. Rather, addressing the supply side constraints to cushion rising production costs due to the high cost of raw materials and energy will push back inflation. He also said the need for well-coordinated fiscal and monetary policies in promoting growth-enhancing and confidence-building policies that would encourage private and foreign capital inflows into the economy has never been compelling.
Olawale-Cole, while noting that this was in view of the need for Nigeria to navigate through the growing uncertainties in the global economy, added that while the CBN embarks on monetary tightening to tame inflation, it should also ensure targeted concessionary credit to the private sector is sustained particularly for Micro Small & Medium Enterprises (MSME’s).
“The CBN needs to gradually transition to a unified exchange rate system and allow for a market-reflective exchange rate. This is in addition to rolling out more friendly supply-side policies to boost productive sectors, bolster investor confidence and help attract foreign investment inflows into the economy,” the LCCI chief stated.