CPPE projects tight monetary conditions in 2025
30 December 2024 |
2:25 am
Given the disposition of the apex bank, monetary conditions may remain tight in 2025, the Chief Executive Officer (CEO), Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, has said.
Key inflation drivers to play critical role for businesses, households
Given the disposition of the apex bank, monetary conditions may remain tight in 2025, the Chief Executive Officer (CEO), Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, has said.
However, he said, the degree of tightening might decelerate in the new year, given the high Monetary Policy Rate (MPR) and Cash Reserve Ratio (CRR). In his 2024 economic review and 2025 outlook made available to The Guardian, yesterday, Yusuf said any space for further tightening has become severely limited.
He added that some key factors that would shape the monetary outlook include the CBN’s strong ideological commitment to orthodox monetary policy, which might continue to result in a hike in interest rates; the CBN’s commitment to the philosophy of inflation targeting; the risk of elevated fiscal deficit and its inflationary implications; and the risk of heightened debt levels and consequential implications for increased debt service.
High inflationary pressure, he said, was a major concern in 2024 with November inflation peaking at 34.2 per cent. Going on to give his inflation outlook for the new year, he said key drivers of inflation such as high energy costs including electricity tariff, high FX and interest rates, high transportation costs, high cargo clearing costs, insecurity that affects agricultural output, climate change and flooding, as well as imported inflation resulting from geopolitical tensions, supply chain disruptions, trade war and tight global monetary conditions, may not completely dissipate in 2025.
He added that while inflation might moderate slightly on the expected reduction of exchange rate volatility and possible rebound of the naira, he said there would be a likely boost in global oil production, as the United States of America increases production and the embargo on Russia eases.
Expressing worry over the decline in the two biggest sectors, the real and agricultural sectors, he said the latter posted a Gross Domestic Product (GDP) growth of 1.14 per cent in 2024, while the manufacturing sector only managed a marginal growth of 0.92 per cent in Q3 of 2024.
“Air transport, quarry and minerals, petroleum refining and textile sectors all remained in recession as of Q3 2024. The implication is that sectors with high job creation potentials and prospects for economic inclusion are still struggling. This situation needs to be reversed to fix the high unemployment and reduce poverty,” he said.
Yusuf added that the huge disparities in the growth of financial services and the rest of the economy reflected the growing decoupling of the financial services sector from the real economy.
“It also exemplifies the failure of the financial intermediation role of the financial services sector in the economy. It is a significant dysfunctionality in the economy, which deserves the urgent attention of policymakers. The present reality is that investing in financial instruments has become much more profitable than investing in the real economy. The risk is also very low. This is inconsistent with our economic aspirations, as it is a major disincentive to real sector investment.
“There is a need for appropriate policy measures to correct the huge disparity in the profitability between the real economy and the financial economy. There is also a progressive crowding out of the real economy in the financial markets,” he pointed out. Highlighting business risks in the New Year, he said businesses would have to worry about some challenges as they craft their strategies for 2025.
“Exposure to the risks vary across sectors; but on average, businesses would need to calibrate their strategies against FX volatility, high interest rates, inflation, unstable financial and monetary policies, unstable regulations, insecurity, politics and corruption, especially concerning public sector transactions and contracts.”
He urged businesses to leverage technology to reduce cost and ensure competitiveness, embrace backward integration to reduce FX exposure and debt financing, adopt efficient energy solutions and domestic supply chains, focus on talent retention and ensure cost optimisation.
On policy side, he urged the government to boost capitalisation of the development finance institutions such as Bank of Industry (BoI), Bank of Agriculture (BoA) and Nigerian Export-Import Bank (NEXIM) to deepen development finance interventions; revitalise and restructure BoA to support the agriculture sector and agro-allied industries with the much-needed concessionary financing; a softer tightening stance from the apex bank to support investment growth and job creation, as well as reduction of the current interest rates caused by the tightening regime.
“The high interest rate increases the risk of loan defaults, increasing the prospects of higher non-performing loans in the financial sector, increases debt service cost for government with the current huge exposure to domestic debts and poses huge risks to business sustainability amid numerous headwinds. There is a need to protect the real economy from the adverse consequences of free market principles. This is the basis of government intervention in a market economy,” he said.
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