CBN on new route to inflation control, raises interest on deposits by banks
• Slows down on interest hike, raises rate by 25 basis points
• IMF downgrades growth to 3.2% in 2023
• Slow interest rate hike sign of cautious move, says expert
• Yusuf: Rate increase will hurt investors
The Central Bank of Nigeria (CBN), yesterday, took a route to combating inflation as it tinkered with the asymmetry corridor, increasing banks’ incentives to unpack their idle funds.
Whereas it slowed down on its interest rate hike to 25 basis points (bpts) – the smallest since the start of the anti-inflation war in May 2022 – bringing the Monetary Policy Rate (MPR) to 18.75 per cent, it adjusted the asymmetry corridor from +100/-700 to +100/-300.
The adjustment means the banks would lend to the Central Bank of Nigeria (CBN) at MPR less 300 basis points through the discount window. Previously, the apex bank borrowed from commercial banks at MPR less 700 basis points (seven per cent).
By implication, commercial banks would now earn 15.75 per cent. Hitherto, they earned 11.5 per cent from the standard deposit facility (SDF). The move is seen as a strategic move of restricting credit and cap liquidity. Whereas the adjustment could restrict credit flow, experts are afraid it would impact local production negatively.
President Bola Tinubu had promised a low-interest rate to lay the foundation for a robust credit economy – a statement interpreted in some quarters as a signal of likely meandering in the responsibilities of the monetary authority as guaranteed by the CBN Act.
The hike is a contradiction of the President’s promise at his famous inaugural speech. But it also means the current CBN management could muster the courage to assert its independence against many odds.
The hike came amid a slight downgrade of the country’s growth prospect to 3.2 per cent by the International Monetary Fund (IMF). The Acting Governor of CBN, Folashodun Sonubi, who spoke after the Monetary Policy Committee (MPC) meeting held in Abuja, identified the rising cost of food as a key driver of inflation and the need to rein in the worrying development.
“The committee remains cautious in arriving at a policy decision as members noted, the need to continue to support investment which will ultimately lead to the recovery of output growth. The balance of these arguments is in favour of a moderate rate hike to sustain efforts of anchoring inflation expectations, narrow the negative real interest rate gap and improve investor confidence.
The MPC was thus resolved by the majority to raise the monetary policy rates. Six members voted to raise the monetary policy rate. Four by 25 basis points, while two by 50 basis points. Five members voted to hold the monetary policy rate constant. All members voted to narrow the asymmetric corridor from plus 100 to minus 700 basis points to a new level of plus 100 and minus 300 basis points around the MPR. In summary, the MPR voted to raise the policy rate by 25 basis points from 18.5 to 18.75 per cent adjust their symmetric corridor to plus 100 minus 300 basis points and retained the CRR at 32.5 per cent and retain the liquidity ratio at 30 per cent.”
The MPC urged the central bank to sustain its macro potential surveillance over the banking system. Sonubi stressed that MPC members were of the view that the committee was confronted with only two policy options to hold or hike the policy rates to offset the moderate increase in headline inflation, which stood at 22.79 per cent last month.
He added that members agreed unanimously that the previous rate hikes had indeed greatly moderated the pace of price increases. In his reaction to the decisions of the MPC, the Chief Executive Officer of Dairy Hills Limited, Kelvin Emmanuel said the decision to raise rates by 25 basis points is an acknowledgment of the fact that increasing the MPR to tighten monetary policy is a disincentive for lending to the real sector of the economy.
He explained: “The decision to tighten the asymmetric corridor to +100-300 is a tool to encourage banks to bring in more deposits to the Central Bank through an increase in the standing deposit rate. I was expecting the MPC to either tighten the corridor or reduce the Cash Reserve Ratio from 32.5 per cent. Choosing to raise the standing deposit rate in the corridor is a welcome development for reducing cash supply as a tool to rein in inflation.”
He submitted that he does not expect the GDP growth rate to exceed three per cent for year 2023 from the current 2.31 per cent growth rate because the impact of the liberalization of the forex markets on petrol prices will reduce the per capita income of Nigerians and lead to demand destruction for vast swathes of the economy.
Also, Prof. Uche Uwaleke described the MPC decision to increase 25 basis points to 18.75 per cent in an attempt to thread a middle-of-the-road path.
Uwaleke explained that it was obvious that it cannot do better given the serious economic concerns facing the nation.
The professor of the capital market said: “The trepid increase by just 25 basis points to 18.75 per cent is an acknowledgment of the fact that there’s very little the CBN can do to tame supply-side-induced inflation via the policy rate.”
He further explained that on the other hand, a decision to maintain policy parameters could be misconstrued as insensitivity on the part of the CBN concerning rising inflation.
Meanwhile, ActionAid Nigeria has raised concern that Nigeria’s debt service ratio will peak from 101.5 per cent in 2022 to 121 per cent of the revenue by 2023.
The group lamented that the bulk of Nigeria’s retained revenue is devoted to debt service as in 2021 the retained revenue was N4.64 trillion while the debt service was N4.22 trillion.
This comes as the Director General of the Debt Management Office (DMO) Ms Patience Oniha stressed the need for less focus on Nigeria’s debt burden and more attention on increasing revenue generation.
She said: “The major reason for the growth of debt stock growth is the budget deficit, this year alone N11 trillion naira of the N21 trillion is a budget deficit and N10 trillion of the deficit will be coming from borrowing. But what is missing is the revenue, our debt stock is much higher than the revenue because revenue is not performing.”
She stated this while speaking during a technical roundtable on economic agenda-setting for President Bola Ahmed Tinubu’s administration organized by ActionAid and the Centre for Social Justice where she pointed out that Nigeria’s case is such that total public debt to GDP is still below 25 per cent and by the time the ways and means borrowings is added by June, it will be much higher.
She said: “Debt service to revenue is very high. Sometimes last year it crossed 100 per cent. Why is it so? It is because revenue is not performing. We need to focus significantly on revenues. There is no way the government can stop borrowing because there is a need to service the debt that was accumulated for a long time.”
Reacting, a leading economist, Dr. Muda Yusuf, said the transmission mechanism of interest rate on inflation is “extremely weak”, hence the money supply targeting could be shadow chasing.
“The hike in the MPR did not come as a surprise because of the surging inflation and the current pressure on the exchange rate. These are macroeconomic economic conditions that the CBN would not ignore. There are concerns about the real interest rate, which is currently in negative territory,” he noted, however.
“But the hike in rate would hurt investors in the real economy as they are already grappling with numerous headwinds. These include the spiking energy cost, depreciating exchange rate, increasing cost of logistics, weak purchasing power and spiralling inflation.
“The main drivers of inflation at this time are the twin problems of rising energy cost and the depreciating exchange rate. Meanwhile, the increase in MPR is unlikely to have any significant impact on inflation,” he noted.
The ActionAid Country Director, Ene Obi, however, noted that international best practices prescribe that the debt service-to-revenue ratio should not be more than 20 per cent of export earnings or 30 per cent of the revenue of low-income countries.
Obi regretted that the country’s public and publicly guaranteed debts are not more than 40 per cent of the GDP and will reach 46 per cent by 2023 adding that with the unification of the exchange rate Nigeria’s foreign debts will increase in value by not less than 40 per cent.
She noted that as a response mechanism to the current economic and fiscal environment, ActionAid Nigeria in partnership with CSJ and Nigeria Labour Congress designed an economic blueprint for the current administration.
Obi explained that the blueprint is a compendium of alternative policy architectures that could effectively lead to quick recovery and accelerated growth of the economy.
The Lead Director CSJ, Eze Onyepere, noted that the essence of the gathering was to contribute to the agenda of Tinubu’s administration considering that Nigeria is leaving in challenging times from economic and social issues. He pointed to policies such as the fuel subsidy removal, unification of the exchange rate and the planned introduction of palliatives to cushion the effect of policies, saying the essence of the gathering is to look at alternative actions to produce better results.
He said from Action Aid, CSJ and NLC point of view they feel that other things can be done differently that will still produce the essential result for the majority of Nigerians.
In the meantime, Nigeria’s growth may shrink by 0.1 per cent in 2023 from 3.3 in 2022 to 3.2 this year and is expected to dip further by 3.0 per cent in 2024, the International Monetary Fund’s latest World Economic Outlook Growth projections have shown.
In the same vein, in sub-Saharan Africa, growth is projected to decline to 3.5 per cent in 2023 before picking up to 4.1 per cent in 2024. The report also said global headline inflation is set to fall from an annual average of 8.7 per cent in 2022 to 6.8 per cent in 2023 and 5.2 per cent in 2024 as projected in April.
“It is proving more persistent than projected, mainly for advanced economies, for which forecasts have been revised upward by 0.3 percentage points for 2023 and by 0.4 percentage points for 2024 compared with the April 2023 WEO. Global core inflation is revised down by 0.2 percentage points in 2023, reflecting lower-than-expected core inflation in China, and up by 0.4 percentage points in 2024. On an annual average basis, about half of economies are expected to see no decline in core inflation in 2023, although, on a fourth-quarter-over-fourth-quarter basis, about 88 per cent of economies for which quarterly data are available are projected to see a decline. Overall, inflation is projected to remain above target in 2023 in 96 per cent of economies with inflation targets and 89 per cent of those economies in 2024,” the report noted.
On the factors that are driving the figures, the report said: “Monetary policy tightening is expected to gradually dampen inflation, but a central driver of the disinflation projected for 2023 is declining international commodity prices. Differences in the pace of disinflation across countries reflect such factors as different exposures to movements in commodity prices and currencies and different degrees of economic overheating. The forecast for 2023 is revised down by 0.2 percentage points, largely on account of subdued inflation in China. The forecast for 2024 has been revised upward by 0.3 percentage point, with the upgrade reflecting higher-than-expected core inflation.”
According to the report, policy priorities are critical currently. Specifically, it identified enhancing the supply side and strengthening resilience to climate change; easing the funding squeeze for developing and low-income countries; rebuilding fiscal buffers while protecting the vulnerable; maintaining financial stability and preparing for stress and conquering inflation.
It stated that central banks in economies with elevated and persistent core inflation should continue to signal their commitment to reducing inflation.
It maintained that the fast pace of monetary policy tightening continues to put the financial sector under pressure, adding that strengthened supervision and monitoring risks to anticipate further episodes of banking sector stress is warranted.
With fiscal deficits and government debt above pre-pandemic levels, credible medium-term fiscal consolidation is in many cases needed to restore budgetary room for manoeuvre and ensure debt sustainability. Fiscal adjustment is currently projected.
It stressed the need for reforms that loosen labour markets by encouraging participation and reducing job search and matching frictions would facilitate fiscal consolidation and a smoother decline in inflation toward target levels.
It added: “They include short-term training programmes for professions experiencing shortages, passing labour laws and regulations that increase work flexibility through telework and leave policies, and facilitating regular immigration flows.”
Get the latest news delivered straight to your inbox every day of the week. Stay informed with the Guardian’s leading coverage of Nigerian and world news, business, technology and sports.