At the last Monetary Policy Committee meeting of the Central Bank of Nigeria (CBN), the Committee once again increased interest rates. This has got many informed citizens talking about its effects on businesses; BENJAMIN UMUTEME writes.
The primary responsibility of any Central Bank globally is to ensure price stability. This means they need to control both inflation – when prices go up – and deflation – when prices go down.
Deflation depresses the economy and fuels unemployment, so every central bank sets a target of moderate, positive inflation to encourage gradual, steady growth.
However, when inflation begins to skyrocket, then it’s obvious the central bank needs to take the painful decision of taming it.
Excessive inflation can rapidly shatter the benefits reaped in previous years of prosperity, erode the value of private savings and eat up the profits of private companies. Bills become an uphill struggle for everybody: consumers, businesses and governments are all left to scramble to make ends meet.
With global economies on the tenterhooks, largely driven by the Russia-Ukraine war, on one hand and the after effect of Covid-19 pandemic on the other, global supply chain has been disrupted which in turn has led to price pressure ultimately entrenching inflation globally.
With the sharp rise in inflation across both the advanced and emerging market economies not likely to abate soon, this continues to put pressure on price levels, thus leaving the CBN with little option.
This is the moment when monetary policy comes into play.
However, it does appear that in spite of efforts by the central banks, inflationary conditions have refused to go away.
And European Central Bank (ECB) President Christine Lagarde was apt when she said “high inflation is a major challenge for all of us.”
Understanding monetary policies
Monetary policy is a set of actions to control a nation’s overall money supply and achieve economic growth. Monetary policy strategies include revising interest rates and changing bank reserve requirements. Monetary policy is commonly classified as either expansionary or contractionary.
The interest rate is one of the key tools deployed by central banks across the world to manage the flow of money and productivity in their respective countries. A change in the interest rate could have an effect on macroeconomics and other key economic indicators like consumer spending and borrowing.
For the International Monetary Fund (IMF), “Stable prices are a crucial prerequisite for sustained economic growth. With risks to the inflation outlook tilted to the upside, central banks must continue normalizing to prevent inflationary pressures from becoming entrenched. They need to act resolutely to bring inflation back to their target, avoiding a de-anchoring of inflation expectations that would damage credibility built over the past decades.”
In Nigeria, monetary policy tools have allowed the CBN to effect changes in broad monetary policies in tandem with fiscal policy.
At the last MPC meeting held on the March 21, CBN Governor, Godwin Emefiele announced that the Committee resolved to raise the MPR by 50 basis points to 18.0 per cent; retain the asymmetric corridor of +100/-700 basis points around the MPR; retain the CRR at 32.5 per cent; and also retain the Liquidity Ratio at 30 per cent.
In arriving at the decision, the Committee noted that noted that, “Whereas MPR was increased by 500 basis points in Nigeria, from 12.5 per cent in 2022 to 17.5 per cent in January 2023, the Financial Soundness Indicators (FSIs) in Nigeria shows that the Nigerian banking system remain resilient due largely the stringent prudential guidelines put in place by the CBN which has resulted in a strong build-up of not only the Cash Reserve Ratio (CRR) in Nigeria, but also the Liquidity Ratio and capital Adequacy Ratio. In the light of these strong FSIs, MPC was comforted that its various decisions in increasing MPR have had moderate impact on inflation, given that the rate appears to have plateaued in Nigeria.”
Speaking with Blueprint Weekend, the president of Association of Capital Market Academics of Nigeria (ACMAN), Prof. Uche Uwaleke, noted that despite the opposition to the MPR hike, the apex bank’s primary duty “is to tame inflation.”
Affirming MPC’s position, Uwaleke said it was obvious that the Committee was still concerned about rising inflation and the pressure in the forex market against the backdrop of its primary mandate of maintaining price stability.
“However, I had expected MPC to maintain a hold position considering the significant drop in currency in circulation occasioned by the currency redesign policy and the fact inflation rate actually decelerated month on month between January and February 2023. The adverse impact of the recent cash scarcity on productive activities as well as the conclusion of election season should have provided justification for a hold position.
“That said, I think that the increase in the MPR by 50 basis points is a signal to financial markets that the CBN has begun the process of rate-hike pause and I expect that a complete halt in policy tightening will most likely happen at the next scheduled meeting of MPC in May.
“This is necessary in order to stimulate economic activities and create job opportunities,” he said.
What does it mean for businesses?
Experts have said that the tightening of the monetary policy in Nigeria likely has a mixed impact on small and medium businesses. While it may make borrowing more expensive and reduce demand, it could also help to curb inflation and stabilise the economy in the long run.
The recent tightening by the apex bank means that borrowing money will become more expensive for small businesses and citizens, as interest rates on loans will likely increase. This could make it more difficult for small businesses to access the capital they need to grow and expand their operations. Additionally, with less money circulating in the economy, consumer spending and demand for small businesses may decrease.
However, the uncertain economic environment in Nigeria may make it difficult for small businesses and SMEs to navigate the changes that come with interest rate hikes.
On the other hand, the tightening of monetary policy could help to curb inflation, which has been driven by elevated food prices in the country. This could help to stabilise the economy in the long run, making it easier for small businesses and SMEs to plan for the future.
Friday Efih, an economic expert, told this reporter in a telephone interview that people are concerned about the short-term gains of the tightening without looking at its medium and long term impact on the economy.
“While it is not out of place to think of short term benefits of any policy, we should begin to look more at the long term benefits. The question should be, what is the CBN trying to achieve with interest rates hike? It is obvious that if inflation can be tamed, the economy will be on the part of growth because inflationary pressure can only do one thing: wipe out the gains of every other monetary or fiscal policy,” Efih said.
Part of the communiqué read by the CBN governor stated that, “The MPC was of the view that although the inflation rates moderated marginally in December, the economy was confronted with the risk of high inflation with adverse consequences on the general standard of living. The committee therefore decided to sustain the current policy at this point in time to further rein in inflation.”
Uwaleke said, “The central bank has a duty to tame inflation. So, that is why in most economies’ central banks are meant to be independent. Otherwise the fiscal authority may want to keep interest rates low MPR; so, they can borrow at a cheaper rate. So, raising the MPR will increase the cost of borrowing. And that will mean the cost of establishing domestic debt will of course increase.”
And all this would not augur well for small and medium businesses.