MPC Members Say Inflation Spike, Insecurity, Oil Price, 2023 Polls, Risks to GDP Projection

Members of the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC), warn that the 3.24% growth projected for the Nigerian economy this year is under threat from what they identified as downside risks such as the heightening insecurity situation across the country.

In their personal statement during the last MPC meeting held between May 23 and 24, they listed others as the global oil price developments arising from the ongoing war between Russia and Ukraine that broke out in February, the lingering COVID 19 in China, the spike in inflation and uncertainty around next year’s general elections, among others.
In his own statement explaining what influenced his vote at the meeting, Professor Festus Adenikinju, who teaches Microeconomics, Petroleum and Energy economics, Energy Policy and Regulations. at the University of Ibadan, said besides these risks are “major threats to economic growth and employment generation.”

He said he voted to raise the benchmark Monetary Policy Rate (MPR) by 150 basis points, from 11.5% to 13.0%, following concerns at the meeting about the current elevated level of inflation, which he said “is bad for growth, employment, and poverty reduction.

“The continue increase in inflation rate since November 2021 is already affecting economic agents. Evidence shows that inflation expectations are positive, and second round effects of inflation are already reinforcing current levels of inflation,” he added.

Adenikinju, who is also a Research Professor at the Centre for Econometrics and Allied Research, expressed worry “that Nigeria is not able to benefit maximally from the current upsides in the global oil market. We were not only unable to ramp up our production levels to meet the OPEC quota, no accretion to foreign reserves is also taking place, and government deficit and public debts are going north at a time we should be writing down our debt profiles and even building up a buffer for the inevitable raining days ahead.”

The current food price shock, he stressed, “is also a call for the country to reduce external dependence and invest more on agricultural output and its value chain. The country has sufficient land resources and favourable weather conditions to be self-sufficient in many of the food products we import. The CBN is already doing a lot of interventions in this area. The deposit money banks, and the fiscal must complement the efforts of the bank.

He also expressed concern “about government budgetary performance. The rising share of governments in total credit to the economy by the banking system suggests crowding out effects of private sector borrowings. Governments should divert to non-debt means of funding its activities. Government must grow its revenue base, reduce waivers to economic agents, plug leakages and wastes, and address the wasteful petrol subsidy system. The huge energy deficit must be urgently addressed.

Mrs. Aisah Ahmad, a deputy governor of the CBN and member of the committee, who voted raise the MPR by 100bps to 12.5%, agreed on the need to rein in on inflation, which is driven mainly by structural factors, noted the critical need “to ensure that monetary developments do not exacerbate the situation. These structural factors include persisting security challenges, energy costs and logistical bottlenecks related to transportation of produce from farm to market that continue to constrict food supply, resulting in rising food prices.

“This is despite significant progress with ramping up food production as the MPC noted a marked reduction in prices of some food items at the farm gate,” even while urging caution “in raising the policy rate, recognizing underlying structural factors driving price developments and the potentially negative effect of a sudden and significant rate hike on credit expansion, financial system stability and economic growth.

For Edward Adamu, another deputy governor, “following several months of double-digit inflation, and given recent multiple shocks, it is logical for expectation of further increases in prices to build. A predominant role of monetary policy is to anchor inflation expectation.

He urged the CBN “to signal its discomfort with an undesirable path of inflation by doing something fundamental – like raising its policy rate. I view the evolution of consumer prices in recent months and the unstable outlook as credible grounds for some monetary policy action.”

He however reiterated the enormous challenges faced globally by monetary policy “given that risks are spread across both growth and inflation objectives in most economies.”

He voted to raise the MPR by 150 basis points to 13%, thereby addressing “the demand factors underlying current inflationary pressures and to also dampen expectation of further increases in prices.”

Also, Prof. Mike Obadan in his own personal comment also noted the nation’s inflation, “has since February 2022, been accelerating at a very worrisome pace, eroding purchasing power of the citizens and threatening economic recovery. If the current trend is maintained, it could trigger a recession due to weakened aggregate demand.”

Although the inflation is driven by visible non-monetary factors, the influence of monetary factors cannot be ruled out in view of developments in the monetary aggregates, he said continues “to exhibit features which make monetary policy choices difficult for the policy makers, in particular, the Monetary Authority. Two of these features are fragile economic growth and escalating inflation.

“Others are high and unstable exchange rate, uncomfortable external reserves levels (the stock at US$ 38.61bn in April, 2022 covers 7.2 months of import of goods and services), crude oil export regime which does not yield accretion to external reserves, weak capital inflows and balance of payments position, bourgeoning fiscal deficits and associated high domestic and external debt, both of which gulp a significant proportion of government revenue in debt servicing, etc.

Voting to raise the MPR by 100 basis points from its extant level of 11.5 percent to 12.5%, he urged the CBN to “consider tightening the monetary policy stance by adjusting the Monetary Policy rate upwards. Along with other complementary measures, the raised rate should lead to the desired downward trend in headline inflation. Importantly, a hiked MPR could douse the demand pressures in the foreign exchange market and may also spur desired capital inflows/stem outflows as well as boost external reserves.”

Dr. Kingsley Obiora believes Nigerians “need low and stable inflation that preserves the value of their hard-earned income and savings – and this will require a tightening policy stance. High inflation affects everyone, including households, firms, and businesses. It particularly hurts the lower-income group because it easily erodes their purchasing power, and exacerbates poverty and inequality. Furthermore, the current inflationary pressures are not only driven by structural issues but also by monetary factors partly due to the buildup to the 2023 general election.”

He country’s modest growth, he noted, “was, in part, due to the CBN continued intervention programmes to stimulate growth across multiple sectors of the economy, including MSMEs, agriculture, manufacturing, healthcare and individual households. To further sustain this modest recovery, the Bank has extended the concessionary interest rate of 5.0 per cent of its various interventions by one year, ending March 1, 2023.

“Therefore, having achieved some modest recovery with the continued support from the Federal Government and the CBN, the time is appropriate to contain the rising inflationary pressures to avoid reversal of this recovery.”

While calling for an aggressively increase the MPR to “contain inflationary pressures in the short-to-medium term, sustain the recovery, moderate capital outflows, and minimize the effect of exchange rate pass-through to domestic prices,” following which he voted to raise MPR to 13% from 11.5%.