At 27.33 per cent in October, the inflation rate has for decades brought untold hardships to businesses, reduced people’s purchasing power and forced people to live below the poverty line. To reverse the trend, the Central Bank of Nigeria (CBN) has adopted an explicit inflation targeting framework that would enhance the effectiveness of its monetary policy, reports, Assistant Business Editor, Collins Nweze
Billy Aderemi, a Lagos-based civil servant was making big plans for his daughter, Emmanuela’s 15th birthday slated for November 10. During the three-month planning, he set aside 10 percent of his N300,000 monthly salary to make the event memorable.
A day before the event, Aderemi went to Spar Supermarket in Ilupeju, Lagos to buy birthday cake, drinks and other items in readiness for the celebration. But it never held.
“After putting the items needed on the trolley, and the cashier gave me the total bills, I found out that the money could only cover half the costs. Prices for almost all the items had doubled. Hence, we decided to postpone the celebration till next month,” he lamented.
Aderemi is just one of the millions of Nigerians and businesses finding it difficult to cope with the rising prices of goods and services due to steady rise in inflation.
The sad story of inflation surge continues to reverberate daily across different spectrums of the society. The Central Bank of Nigeria (CBN) Governor, Dr. Olayemi Cardoso, narrated his encounter with a group of small business owners feeling the pangs of inflation spike in their operations.
He said:” I recently met with a group of small business owners who expressed their concerns about the impact of inflation on their operations. They shared stories of struggling to maintain affordable prices for their customers while facing rising costs for raw materials and supplies. The instability caused by inflation not only affects their profit margins but also hampers their ability to plan for the future. These entrepreneurs stressed the need for price stability to create a conducive business environment that allows them to thrive and contribute to the economy.”
Cardoso, who spoke at the 58th Annual Bankers Dinner organised by the Chartered Institute of Bankers of Nigeria (CIBN) in Lagos, went further: “In recent discussions with individuals from different walks of life, I encountered a young family trying to make ends meet in the face of rising prices.”
“They shared their worries about the erosion of their purchasing power and the challenges of meeting basic needs within a tight budget. They emphasised the importance of stable prices to protect the well-being of ordinary citizens and ensure a fair distribution of resources. It is crucial that we prioritise price stability to safeguard the livelihoods of our fellow Nigerians.”
Data from the National Bureau of Statistics (NBS) showed that the inflation rate increased to 27.33 per cent in October, higher than September’s 26.72 per cent rate. The inflation peak was in January 1996 when it reached 47.56 per cent.
The Statistician-General of the Federation, Adeyemi Adeniran, attributed inflation spike to the increase in prices of food and non-alcoholic beverages (14.16 per cent), housing, water, electricity, gas & fuel (4.57 per cent), clothing and footwear (2.09 per cent), transport (1.78 per cent), among others.
An economist and Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, sees exchange rate pass through, forex scarcity and rising energy prices as also contributing significantly to inflation rate surge.
For instance, the food basket increased by 31.85 per cent. The principal commodities pushing the food index are flour, semovita, sugar, and noodles. It is noteworthy that in the last decade, the trend is for food price deceleration in October through December (Q4), which is typically the harvest season.
But that did not happen this year due to the cross elasticity of demand impact of imported foods on locally produced commodities like yams, garri, beans, and cassava.
An example of this phenomenon is the relationship between the price of wheat flour and yams. The price of flour has spiked by 46.88 per cent to N47,000 per 50kg bag.
At this time in 2022, the price of flour was N32,000 for a 50kg bag. The knock-on effect on yam is evident in its price, which has increased by 16.7 per cent to N3,500 per tuber.
The price of imported commodities increased by an average of 15.36 per cent in October despite the decline in the global food price index by 0.5 per cent to 120.6 points. The spike was due mainly to depreciation in the value of the naira.
For instance, the naira, which traded at N704/$ in the parallel market at the beginning of November last year now exchanges at N1,150 /$ on November 25 this year.
Rewane said the extra cost associated with exchange rate differentials has raised raw materials and production cost for businesses, and subsequently resulted in higher prices for goods and services.
Cardoso disclosed that the CBN will discontinue direct quasi-fiscal interventionist activities and instead utilise orthodox monetary policy tools for implementing monetary policy so as to refocus on its core mandate of ensuring price stability.
This refocus started with CBN’s adoption of an explicit inflation targeting framework to enhance the effectiveness of its monetary policy.
Understanding inflation targeting framework
Senior Economist at the International Monetary Fund (IMF), Sarwat Jahan, said inflation targeting techniques would allow the CBN estimate and make public a projected, or “target,” inflation rate and then, steer actual inflation toward that target, using such tools as interest rate changes.
She explained that since interest rates and inflation rates tend to move in opposite directions, CBN’s actions to raise or lower interest rates will be more transparent under an inflation targeting policy.
The policy is expected to forecast the future path of inflation and compare it with the target inflation rate (the rate the government believes is appropriate for the economy). The difference between the forecast and the target determines how much monetary policy has to be adjusted.
Since inflation targeting is a medium-term focus, policymakers are advised not to be desperate to meet targets on a period-by-period basis.
Still, the apex bank is expected to conduct monetary policy with some degree of independence.
“No central bank can be entirely independent of government influence, but it must be free in choosing the instruments to achieve the rate of inflation that the government deems appropriate,” she said.
CBN fights back with monetary policy tools
The CBN has responded by using Open Market Operations OMO- the purchase and sale of securities in the open market by the central bank- to mop up excess liquidity from the banking system. An OMO auction was recently held with a stop rate of 17.5 per cent for the one-year tenor, attracting oversubscription of N350 billion.
Furthermore, N108.1 billion worth of Treasury Bills with three tenors is being offered to the investing public. This is expected to help reduce liquidity in the banking system and support government fundraising.
The CBN also removed the cap on the Standing Deposit Facility (SDF) to increase activity in the SDF window and manage liquidity and sustained Cash Reserve Requirement (CRR) debits.
The liquidity in the entire banking sector was significantly reduced to under N100 billion in November and a new liquidity management committee inaugurated within the apex bank. The committee meets daily at 8am to assess liquidity conditions and ensure optimal levels.
According to Cardoso, these measures have already started to yield results, as excess liquidity in the banking system significantly reduced and the Overnight Bank Borrowing (OBB) rate increased to a level consistent with the monetary policy programme.
“Month-on-month inflation has also begun to decline, with a growth rate of 0.67 per cent in October compared to 0.97 percent previously. While absolute inflation is still rising, the declining rate of growth indicates progress,” he said.
Cardoso is confident that with continued tightening measures for the next two quarters, the apex bank will be able to effectively manage inflation.
Views from stakeholders
Nigeria Country Representative European Organization for Sustainable Development, Jide Akintunde, said the plan to adopt an inflation targeting framework to directly deal with inflation surge is in order.
He said: “It is the right policy call for the CBN to focus on inflation. Its mandate requires such a focus. Indeed, inflation erodes the welfare of the people. But just to further accentuate the dire need to fight inflation, high inflation is a threat to the government as well. It erodes the social compact between the government and the citizens.
“History is replete with high inflation causing serious social and political backlashes and has been responsible for bringing down regimes. Inflation has been a major driver of poverty in Nigeria, causing the citizens to be edgy and engaged in behaviours that are socially and environmentally untenable,” he said.
Furthermore, the combined efforts of the monetary and fiscal authorities to ramp up food supply and tackle age long structural challenges are also expected to moderate inflation expectations and drive down food and core prices in the medium-term.
For Akintunde, anchoring inflation expectation is an important role of the CBN. He said: “We have talked about single digit as the target, but nine per cent inflation is quite high. So, the CBN has to be ambitious and clear. What specific inflation rate is targeted over the long-term? I believe the ideal figure should be under five per cent. Anchoring inflation expectation is necessary as a roadmap and a guide for investors and producers.
According to him, the statutory role of the CBN in fighting inflation is not contested but the determination to be made is whether the drivers of inflation in Nigeria are within the control of the monetary authority and whether its own interventions are also inflationary.
“There are multiple factors why the CBN will struggle to successfully fight inflation. The first of such is inflationary fiscal policy. The removal of fuel subsidy will increase energy price volatility in Nigeria, based on the vagaries of oil prices in the international market,” he said.
“One of the drawbacks of the market exchange rate, which the government has adopted, is that it can be inflationary. Unless the policy is able to catalyse foreign exchange inflow and stabilise the vaue of the naira, we will continue to struggle with price instability,” he added.
Akintunde disclosed that so far, the government has awkwardly prioritised its consumption and spending. This is a major concern, given the poor attention to productivity and purchase of locally-made products in public sector procurement. This has to change.
“The government and the CBN have tried to address some of the structural issues driving inflation – with the former providing tax waivers and the latter industry-focused intervention funds. Both have been subjected to massive abuses to the level of dysfunction.
“The tax waivers are even anti-competition in nature because they are not offered on a level-playing field. Curbing abuse or corruption in incentive policies is not altogether in the hands of the CBN. It is a matter of law. This is why the rule of law is very important in fostering economic and price stability – something that we are currently not prioritising. In other words, there is a triangle of monetary policy, fiscal policy, and the rule of law in fighting inflation in Nigeria,” he said.
Chief Executive officer, Centre for the Promotion of Private Enterprise (CPPE) Dr. Muda Yusuf, said addressing key drivers of inflation will drastically reduce the inflation rate.
In his words, “key drivers of inflation have not really abated, that is, factors of the foreign exchange rate depreciation; factor of increasing energy cost; increasing transportation cost and also the factor of challenges of trade, that is, clearing cargoes at the ports and high import tariffs,” rising inflation will remain a challenge.
Kicking against ongoing interest rate hike, Yusuf said although the CBN has hiked rates twice in the last two MPC meetings, inflation rate has not abated.
“Evidently, our inflationary conditions are not credit driven. Private sector credit as a percentage of GDP is just about 12 per cent, one of the lowest in the world. This ratio is over 120 per cent in South Africa, and over 200 per cent in the United States of America (USA). It shows the degree to which the banking sector is disconnected from the economy.
“We cannot have a tightening policy in an economy grappling with fragile growth and high unemployment. But the credit conditions are already very tight. Cash Reserve Requirement (CRR) is at 27.5 per cent, one of the highest globally. Effective CRR for some banks is about 50 per cent or even more. Liquidity Ratio is 30 percent. MPR is 14 per cent. These restraining thresholds are already on the high side. Financial intermediation is already being considerably impeded,” he said.
Yusuf added that investors that have credit exposure to the banks are already groaning over hike in interest rates on the back of the increases in MPR over the last two MPC meetings. This, he stated, is in addition to the cost pressures driven by the forex crisis and the soaring energy cost.
However, former Executive Director, Keystone Bank Limited, Richard Obire said CBN’s use of traditional monetary and advisory tools in achieving its price stability goals is in order.
“What this means is that the CBN will now have to be very effective in managing system liquidity to influence interest and exchange rates which affect productivity, production and other value chain costs which then pass through to inflation. It may need to put a lid on lending to the government. Recent high levels of ‘ways and means’ lending to the outgone government have to be fully resolved,” Obire advised.
He advised the CBN to raise the quality of its evidence based and data driven advisory service to the fiscal authority. This, he said, will lead to better outcomes in agricultural productivity and moderate food inflation.
“Since activities of the fiscal authority can have great impact on system liquidity and general price level, the CBN has to coordinate closely with that part of the government to achieve more effective alignment of goals and strategies,” he advised.
Other analysts recommended that a broad-based harmonisation of fiscal and monetary policies towards addressing the identified structural constraints causing inflation figures to rise will help to moderate inflationary pressure in the medium term.
Not a panaceaInflation targeting technique has been successfully practiced in a growing number of countries over the past 20 years, and many more countries are moving toward this framework.
The first country to adopt inflation targeting was New Zealand. The only central banks to have stopped inflation targeting once they started it are Finland, Spain, and the Slovak Republic—in each case after they adopted the euro as their domestic currency.
Armenia, the Czech Republic, Hungary, and Poland adopted inflation targeting while they were making the transition from centrally planned to market economies. Several emerging market economies adopted inflation targeting after the 1997 crisis, which forced a number of countries to abandon fixed exchange rate pegs.
Over time, inflation targeting has proved to be a flexible framework that has been resilient in changing circumstances, including during the recent global financial crisis.
Individual countries- including Nigeria- however, must assess their economies to determine whether inflation targeting is appropriate for them or if it can be tailored to suit their needs.
Finally, the CBN’s core mandate is price stability, and any other mandate that conflicts with this deserves to be relegated, at least until the inflation war is won.
