The Centre for the Promotion of Private Enterprise (CPPE) said the outcome of the Monetary Policy Committee (MPC) meeting on Tuesday would hurt the real sector of the economy which is already contending with numerous macroeconomic challenges.
In a statement signed by Muda Yusuf, director of CPPE, the think tank said the increase of monetary policy rate (MPR) from 18.75 per cent to 22.5 per cent and cash reserve ratio (CRR) from 32.5 per cent to 45 per cent pose a major risk to the financial intermediation role of banks in the Nigerian economy.
“The outcome of the Monetary Policy Committee (MPC)s meeting of 27 February 2024 would hurt the real sector of the economy which is already contending with numerous macroeconomic challenges,” Mr Yusuf said.
He explained that the increase would constrain the capacity of banks to support economic growth and investment, especially in the real sector of the economy because the increases are quite significant.
“Although the decision was consistent with the typical policy response of the Central Banks globally, it failed to reckon with domestic peculiarities. The key drivers of Nigeria’s inflation are largely supply-side variables and the CBN ways and means of financing.
“Over the last two years, there has been persistent monetary policy tightening, yet there has not been any significant impact on the inflationary pressures. If anything, the general price level has been continuously on the increase,” he said.
The think tank said it recognised that the primary mandate of the CBN is price stability, but numerous headwinds had posed significant risks to this critical objective.
Some of these, the think tank said, include the surge in commodity prices and impact on energy cost, disruptive effects of insecurity on agricultural output, and global supply chain disruptions.
“The surge in ways and means of finance also makes the CBN a culprit in the inflation predicament over the past few years. The hike in MPR or CRR would not change these variables,” it said.
Already, Mr Yusuf said bank lending has been constrained by the high CRR which was until the latest review, 32.5 per cent.
“The credit situation in the economy is already very tight, with lending rates ranging between 25-30 per cent. The Nigerian banks are yet to live up to their financial intermediation role because of these constraining factors.
“The Nigerian economy is not a credit driven economy, unlike what obtains in many advanced economies which have much higher levels of financial inclusion, robust consumer credit framework and strong correlation between interest rate and aggregate demand,” he said.
He further explained that the level of financial inclusion in the Nigerian economy is still quite low, access to credit by households and MSMEs is still very challenging, and the informal sector accounts for close to 50 per cent of the economy.
“Private sector bank credit as a percentage of GDP was 14 per cent in 2022 in Nigeria. It was 59 per cent in South Africa, 30.9 per cent in Egypt, 30 per cent in Botswana, 51.6 per cent in the United States and 130 per cent in the United Kingdom.
“These underscore the variabilities across economies; thus, policy responses have to be different,” Mr Yusuf said.
Price Levels
The CPPE noted that the transmission effects of monetary policy on the Nigeria economy are still very weak.
“In the Nigerian context, price levels are not interest sensitive. Supply side issues are much more profound drivers of inflation.
“The new dramatic increase in MPR to 22.5 per cent hike means that the cost of credit to the few private sectors that have exposure to bank credits will increase which will impact their operating costs, prices of their products and profit margins, amidst very challenging operating conditions. The equities market may also be adversely impacted by the hike.
“It is thus imperative for the CBN to accelerate the process of increased capitalization of the development finance institutions to create a concessionary financing window for the real sector and the small businesses,” he said.
The think tank said to reverse the spiraling inflation, the government needs to address the security concerns causing disruption to agricultural activities.
READ ALSO: CBN’s MPC will complement fiscal activities to improve economy – Cardoso
Mr Yusuf added that sustaining reforms in the foreign exchange market to stabilize the exchange rate, reduce volatility and stimulate forex inflows.
The think tank said the government should address forex liquidity issues through appropriate policy measures and incentives for forex inflows into the economy.
It added that the government should fix the structural problems to boost productivity and competitiveness of domestic firms.
“Address the challenge of high transportation and logistics cost, reduce fiscal deficit monetization to minimize incidence of high-powered money in the economy and manage climate change consequences to reduce flooding and desertification.
“Ensure the restoration of normalcy and good order at the nation’s ports to reduce transaction costs. Reduce import duty on intermediate products and raw materials for industries to reduce production costs, especially in the light of the sharp depreciation in the exchange rate, address concerns around high energy cost and create an investment friendly tax environment to boost investments and output in the economy,” Mr Yusuf added.
Read the full article here
