The CBN recently increased its benchmark interest rate more than most analysts had anticipated, pushing it above 14% for the first time since the Monetary Policy Rate (MPR) rate as a tool of monetary policy in 2006. The rate was raised by the monetary policy committee from 14% to 15.5%. The cash lenders must retain at the central bank was also raised by the MPC, from 27.5% to 32.5%. That is a covert tightening technique used to soak up liquidity.
The CBN is also cutting back on the number of intervention loans it distributes after hearing concerns from members of its rate-setting committee that the money might be causing the inflation rate, which is at a 17-year high.
Governor Godwin Emefiele further disclosed that the CBN had provided roughly N9 trillion in concessionary loans to businesses in the private sector over the previous three years to stimulate growth. Over 40% of the loan portfolio held by the Apex bank has been collected so far, with about N5 trillion still owing or not yet due.
Since the beginning of the year, Nigeria’s inflation has accelerated, leading the monetary policy committee to raise interest rates by 400 basis points, making it one of just four central banks on the continent to do so.
The protracted conflict between Russia and Ukraine had exacerbated inflationary pressures and has been a major factor in the worldwide disruption of the commodities supply chain since February.
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But even before the war started, the Nigerian economy was dealing with rising inflation, which was mostly brought on by structural issues rather than monetary consequences.
The failure of the fiscal authorities to support the monetary authorities’ efforts in addressing the problems caused by inflation in the economy has been charged on numerous occasions.
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While the CBN has done its part by using its resources, the executive branch of government, in particular, is often accused of playing politics and bureaucracy to downplay the significance of such economic decisions.
The MPC has repeatedly urged the federal government to fulfill its own obligations by addressing infrastructure issues, insecurity, and policy decisions regarding fuel subsidies, among other things, but this has frequently been in vain.
Cost-push inflation, which occurs when the price of raw materials rises and firms raise their prices to maintain a profit, is another factor contributing to Nigeria’s high inflation rate.
The biggest economy in Africa also has fundamental problems, which are made worse by a lack of infrastructure and weak Forex reserve triggered by Oil theft and Petrol subsidy.
There is no doubt that crude oil theft is one of the main causes of the double-digit inflation that Nigerians are experiencing at the moment.
This is consistent with the observation that in 2021, the total amount of taxes collected by the Federal Inland Revenue Service (FIRS) was less than the N8 trillion Nigeria lost to oil theft. This has made the Oil rich country virtually broke resorting to heavy borrowing to fund the budget.
The cost of Nigeria’s fuel subsidies rose to N525.7 billion in August, bringing the total spent this year to N2.568 trillion, according to figures submitted to the government by the state-owned oil company thus making it difficult for the Federal government to invest in critical areas like education, agriculture, and technological advancements.
By dealing squarely with the rising insecurity that is adversely affecting food output, borrowing less from the domestic market, which is driving up interest rates and raising the cost of capital for businesses, and in collaboration with the private sector, exploring innovative means of revamping dilapidated infrastructure, especially roads and railways to reduce the cost of transportation FG can supplement the efforts made by the apex bank.
The FG should also immediately put into action a plan for increased power supply that emphasizes off-grid options and private sector independent power projects while also encouraging the construction of modular refineries to reduce imports of petroleum products and boosts the country’s energy security
Additionally, they can support the CBN’s efforts by using fiscal policy to increase production, increase tax with concessions in important industries like oil and gas, mining, and agriculture, and entice investors with incentives in the manufacturing of steel, machine tools, and essential agricultural inputs and implements.
Combating inflation would be greatly aided if the federal government’s fiscal policies could be balanced with the CBN’s attempts at monetary policy.