Despite tightening measures currency in circulation, inflation remains high

Just last Tuesday, the Central Bank of Nigeria (CBN), at the end of its 298 Monetary Policy Committee (MPC) meeting continued its policy of tightening the monetary policy by raising the Monetary policy Rate (MPR) by 25 basis points to 27.5 per cent, from 27.25 per cent.

MPR is the benchmark interest rate that determines the cost of borrowing from commercial banks.

This latest increase takes this year’s hike to a cumulative 875 basis points.

The CBN explained that its decision to keep the interest rate high is to reduce money in circulation and thereby force down inflation.

However, the CBN appears not to be winning the fight. For instance when the current leadership of the CBN led by Mr. Olayemi Cardoso took charge in October 2023, the currency in circulation was N2.99 trillion while the inflation rate was 27.33 per cent. The MPR at the time was 18.75 per cent.

Since his assumption of office, CBN has raised the interest rate six times from 18.75 per cent in October 2023 to 27.5 per cent in November 2024.

Within the same period, cash in circulation has risen from N2.99 trillion to N4.1 trillion.

At the same time, inflation has jumped from 27.33 in October 2023 to 33.88 per cent, a 6.55 per cent rise in October 2024.

Experts have advised the CBN that the fight against inflation should be a multipronged one involving both the fiscal and monetary authorities because the drivers are more than just too much money in circulation. They said beyond the fluctuation of the exchange rate leading to the depreciation of the naira, other factors such as high energy costs resulting from the hike in both the price of electricity and petroleum products especially fuel, the insecurity that has kept farmers away from their farms, a result of which food prices have remained high, and poor infrastructures, are the main causes of inflation.

These they say are squarely at the foot of fiscal authorities that are doing little or nothing to address them.

Chief Economist of the World Bank Group and Senior Vice President for Development Economics, Indermit Gill at the launch of Nigeria’s Development Update (NDU) by the World Bank in October this year, likened Nigeria to a car with four deflated tyres. He acknowledged that the CBN was working hard to fix the monetary side of Nigeria’s economic challenge. However, he said Nigeria will still not move because monetary policy is just one leg of the Nigerian economy as a car with only one functional tyre cannot move. He called for a collaborative effort between the fiscal and the monetary authorities.

Even Cardoso himself acknowledges this fact when at one of his media interviews he said that the major drivers of inflation are outside the control of the CBN.

But it appears as though the CBN governor came with a mindset that the only way to fight the spiraling inflation in the country is to keep the interest rate high.

He even alluded to that during an interview that the CBN will keep increasing the interest rate for as long as inflation remains high.

Analysts argue that the rise in currency in circulation is a reflection of increased economic activities in Nigeria, especially the increased allocations to states and local government areas.

While the CBN is increasing the interest rate to reduce the people’s access to funds, it is inadvertently creating more problems for the economy as the cost of borrowing money has also increased and businesses that cannot afford it are either shutting down or scaling down their operations.

This has not only worsened the unemployment rate, it is also the reason prices of goods in the market are high.

Ironically, while the CBN sees too much money in circulation, the people are looking for where the cash is, because it is not in their hands but probably under the beds or septic tanks of some politicians who are still in possession of the large volumes of cash that exchanged hands during the 2023 elections, especially during the primaries.

That was what the former CBN governor, Godwin Emefiele wanted to check when he decided to redesign the currency, a move that was frustrated by the same people that now occupy important positions in the present administration. It is not as though the current CBN governor is not aware of this, he just can’t go there.