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Why CBN Must Resist Further Monetary Policy Tightening

The Centre for Promotion of Private Enterprise (CPPE) has called on the central bank of Nigeria(CBN) to resist further monetary policy tightening, as mounting inflationary pressures in the Nigerian economy is yet to abate.

According to the National Bureau of Statistics [NBS], headline inflation accelerated to 21.47 percent in November as against 21.09 percent in October.

On a month-on-month basis, there it increased to 1.39 percent in November as against 1.24 percent in October 2022.

Also, food inflation rose to 24.13 percent from 23.72 percent in October. On a month-on-month basis, food inflation grew by 1.4 percent compared to 1.23 percent in October. Core inflation similarly spiraled to 18.24 percent from 17.76 percent in October.

Muda Yusuf, director, CPPE said that sustained tightened policy penalizes entrepreneurs especially the real sector as it increases cost of credit with heightened prospects of a backlash on growth.

According Yusuf, inflation restraining strategies should accordingly focus on productivity boosting supply side factors and reduction in ways and means funding of deficit.

“The deployment of monetary tightening tools should be put on pause. The Nigerian economy is not a credit driven economy which is why the tightening outcomes has been inconsequential as a tool to tame inflation.

“Inflation had been spiking despite the serial monetary tightening.

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“Over the last one year, the Nigeria inflation story has been a depressing one as reflected in the dynamics of all key price metrics,” Yusuf added.

For him, the key inflation drivers which includes; depreciating exchange rate, rising transportation costs, logistics challenges, forex market illiquidity, hike in diesel cost, climate change, insecurity ravaging farming communities and structural constraints to economic activities have not changed over the last few years.

“Fiscal deficit financing by the central bank of Nigeria is also a significant factor fueling inflation through high liquidity injection into the economy.

“Tapering of monetary easing in the advanced economies is also driving imported inflation and the depreciation in the exchange rate.

Consequences of soaring inflation include erosion of purchasing power of citizens as real incomes collapse, mounting poverty.

Other consequences according to him are escalation of production costs which negatively impacts profitability, shrinking shareholder value in many businesses.

“Taming inflation demands urgent government intervention to fix supply side constraints in the economy.

“Tackling production and productivity constraints, fixing the dysfunctional forex policy, and reducing liquidity injection through ways and means of funding the fiscal deficit,” he said.

Adeyemi Adeniran, the statistician general, attributed the increase in the inflation rate to an increase in the cost of importation due to the continual currency depreciation and a general increase in the cost of production due to a surge in energy cost.

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“While on a month-on-month basis, the Headline inflation rate in November 2022 was 1.39 percent, which was 0.15 percent higher than the rate recorded in October 2022 (1.24 percent).

“The increase in the monthly inflation rate is attributed to higher demand, usually experienced during the festive season.”

“The components that made up the food sub-index in November 2022 was 24.13 percent on a year-on-year basis; which was 6.92 percent higher compared to the rate recorded in November 2021 (17.21 percent).

“The rise in the food sub-index was caused by the increases in prices of Bread and cereals, Oil and fat, Potatoes, yam and other tubers, Food products n.e.c, and fish.

“Whereas the month-on-month food inflation rate in November was 1.40 percent, this was 0.17 percent higher compared to the rate recorded in October 2022 (1.23 percent).

“The increase was attributed to an increase in prices of some food items like oil and fat, fruits, fish and tubers,” he said.

Source: Businessday

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