As 2022 gradually draws to a close there are indications that Nigeria’s monetary policy space would end the year with bruises in battles to rein in structural issues in the country’s macroeconomic and fiscal space which have muted policy effectiveness.
Some of the key legacy issues include rising public debt; rising budget deficit and funding; the poor state of critical infrastructure; high cost of importation of essential goods such as grains and raw materials; the broad-based insecurity across the country which continue to dampen production activities; and increased demand for money associated with the electoral campaign season. These are lead factors driving inflation in Nigeria today.
The factors have consolidated into hard core problem militating against monetary policy effectiveness while pilling pressures on the economy. Thus the Central Bank of Nigeria, CBN, has found itself struggling to deliver on its mandate, especially and recently, that of price and exchange rate stability.
The last CBN’s Monetary Policy Committee, MPC, positions clearly indicated this quagmire.
The Committee, in its September 2022 meeting, noted the continued uptrend in inflation for the seven consecutive months, with headline inflation (year-on-year) rising to 20.52 per cent in August 2022, from 19.64 per cent in July. It rose further to 20.7 per cent in September. Both the food and core components maintained steady acceleration in the past eight months.
The hike in energy prices, such as rising price of Automotive Gas Oil (AGO), hike in electricity tariff, as well as the perennial scarcity of Premium Motor Spirit (PMS) contributed significantly to pushing up the cost of transportation and production.
Inflationary pressures
Eventually, the cost push inflation forced the CBN’ MPC to embark on contractionary monetary policy journey of steadily raising Monetary Policy Rate, MPR. A contractionary monetary policy is designed to reign in on inflation but it also comes with a stall on growth and expansion. Everyone knows that growth and expansion is one thing much desired by Nigeria today. This has now been sacrificed in the dilemma of the apex bank. The apex bank also indicated that it could not guaranty when the journey on inflation targeting will end since they couldn’t predict when inflationary pressures would end. The pressures were coming from factors outside its control.
Upon raising the MPR to 15.5 percent, CBN Governor, Godwin Emefiele, explained, “MPC Members deliberated the impact of the widening margin between the then policy rate of 14 percent and the inflation rate of 20.52 percent.
“At this meeting, the option of reducing the policy rate was not considered as this would be gravely detrimental to reigning in inflation. The committee thus agreed unanimously to raise the policy rate to narrow the interest rate gap and rein in inflation. The committee thus voted unanimously to raise the MPR.’’
Explaining further the Governor said, “The MPC noted with concern the continued aggressive movement in inflation, even after the rate hike at its meeting in May and July 2022, and expressed its unrelenting resolve to restore price stability, while providing the necessary support to strengthen the fragile recovery.
“Our research study at Central Bank has shown us that once inflation trends above 13 per cent, it will retard growth. We have seen inflation in the last four months move so aggressively in Nigeria.
“It is difficult for us, for this MPC with all the data available, with all the research that has been conducted; it is difficult for us not to go in a very aggressive way we decided to go today.
“But at the same time, let us not forget that the inflation rate in Nigeria at 20.5 percent is still higher than our policy rate which means we are still in the realm of negative interest rate which remains injurious to the economy.”
Petrol subsidy pressures
One of the pressure points on Nigeria’s fiscal space that is feeding the inflationary pressures, according to economists, is the mounting public debt, the repayment and deficit financing. Also the nation’s public debt stock is being increased by the petrol subsidy as the government had to borrow N1 trillion to subsidise petrol this year after taking over N3.6 trillion from the treasury for the same purpose.
In a presentation at the Executive Course on Budgeting and Fiscal Transparency at the Army Resource Centre in Abuja recently, the Director-General of the Debt Management Office, DMO, Ms. Patience Oniha attributed the current debt stock to budget deficit, noting that the borrowing plan for 2022 was increased by N1 trillion to enable the government to pay the extra cost of petrol subsidy.
Speaking on the topic, ‘Debt Sustainability Challenges and Strategic Revenue Mobilisation Initiative’, Oniha said that the federal government had to resort to borrowing to fund the budget due to revenue challenges.
She noted that the country was facing a revenue crisis, adding that it has become very important for the government at all levels to pay more attention on how to increase revenue generation as a means of reducing borrowing.
The DMO boss noted that Nigeria was performing poorly in terms of revenue, as she said that the country had a far lower revenue record than it could generate.
Debt structure worries CBN
However, members of the CBN’s MPC expressed concern over the increasing Eurobonds component in the Nigeria’s external debt structure.
They noted that the federal government’s preference of Eurobonds at high interest costs, with the associated exchange rate risk may likely hurt Nigeria soonest.
In his personal statement in the communiqué of the May 2022 MPC meeting, a member of the CBN Committee, Asogwa Robert, said: “The escalating fiscal sector deficits with the attendant rising debt ratios are part of the weak links in the domestic economic environment.
“Particularly worrisome about the debt structure, is the increasing accumulation of Eurobonds in the external debt component, while minimising concessionary loans. The unexplained government preference of Eurobonds at high interest costs, with the associated exchange rate risk may likely hurt Nigeria sooner than anticipated.
“Already, Nigeria is being mentioned by the IMF (International Monetary Fund) as one of the countries that may likely move into debt distress, given the staggering $100.07 billion dollars of public debt stock as at March 31, 2022.”
Another member of the CBN’s MPC, Mr Adenikinju Festus, in his personal statement said: “I am worried that Nigeria is not able to benefit maximally from the current upsides in the global oil market. “I am concerned 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. “Government 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.”
OPS worried over fiscal, monetary policy disconnect
At the backdrop of the seeming disconnect between the fiscal and the monetary policies, the Nigeria Employers’ Consultative Association (NECA) has urged the Federal Government to reappraise its monetary and fiscal policies interfaces in view of the multifaceted challenges confronting the nation.
Its Director-General, Mr Wale Oyerinde, said that the policies had little impact either because of inherent inconsistencies or strategic sabotage by external forces.
He said that the lack of adequate consultation during their crafting and implementation could also be a factor.
He stated: “While the monetary policies aim to reflate the economy through the various interventions, the fiscal policies tend to create bottleneck for the productive sector.
“This they do by introducing new taxes and levies, such as Telecommunication Excise Tax, Excise Duty on carbonated drinks, Beverage’s tax, NYSC Levy among many others.
“The introduction of these taxes and levies and other anti-enterprise regulations, to a large extent, will further hamper the consumption pattern of the citizens.”
According to him, they can also reduce capacity utilisation of enterprises and worsen the macroeconomic situation of the country due to the multiplier effects.
He said that the recently held Employers’ Summit in Abuja came up with some key conclusions and recommendations.
These, he said, could serve as alternative policy action for government to consider.
Oyerinde said that as a matter of urgency, there should be deliberate alignment between monetary and fiscal policies to reduce the contradictory tendencies.
He further stated: “A deliberate and independent mechanism with the active involvement of the private sector should be put in place to regularly gauge the effect and impact of policies and regulations.
“Ineffective ones should be changed and new ones formulated.’’
The Director-General lauded the Central Bank of Nigeria’s Micro, Small and Medium Enterprises Development Fund (MSMEDF).
“We urge that the implementation and allocation process should involve the Organised Private Sector of Nigeria in order to enhance its credibility, effectiveness and ensure strict monitoring,” he said.
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