It is even worse as experts are no longer speaking with one voice on whether the MPC should hike the monetary policy rates, keep it where it is or lower it.
Olayemi Cardoso, the governor of the Central Bank of Nigeria is not a man to be envied at this time because this is definitely not the best time to be the CBN governor.
Cardoso took four months after his appointment to convene the first monetary policy committee (MPC) meeting. When he finally decided to hold the first one in February this year, he acted like a reserve player who watched the match from the bench. The MPC jacked up the monetary policy rate (MPR) by 400 basis points to peg the lending rates at 22.75 percent from 18.75 percent, believing that that was the needed punch to knock out inflation. The MPC was forced to further jack up the MPR by 200 basis points in the following month of March raising the lending rates to 24.75 percent, a figure described by experts as the highest in recent history. But still, like the stubborn goat, inflation has refused to bulge.
As the CBN governor walks into the hall to chair the MPC meeting this week, he would be saying in his mind, ‘I’ve done all I should do, what else is left?’
Of course he has already given a hint to his frustration at a recent interview he granted a foreign media outlet when he threw his hand in the air saying, “we don’t have control over food inflation which is the biggest driver of headline inflation.”
By that, the CBN governor was telling the fiscal authorities to please do something to compliment what he is doing on the monetary side.
It is now clear to Mr. Cardoso why his predecessor, Godwin Emefiele delved into development finance and began to engage in quasi fiscal policy activities. The politicians just don’t seem to know how their actions and inactions are negatively impacting the economy, for them everything is about winning the next election.
This government came in with a bang with the President on his inauguration ground announcing that subsidy is gone. That won him political points, but the country has yet to recover from the shock even as the President prepares to mark his first year in office.
Of course his team will roll out his numerous ‘achievements’ in his first 365 days in office, but Nigerians will have their own list which definitely will include high unemployment, poor infrastructure, multiple taxation, starvation, high cost of living, heightened insecurity and general despair.
Many manufacturing companies are shutting down, others are exiting the country because they can no longer cope with the cost of running their businesses. The consequence of this is that more Nigerians are losing jobs, swelling the unemployment market, even though the National Bureau of Statistics ( NBS) keeps giving unemployment figures that beat common sense.
The Manufacturers Association of Nigeria (MAN) recently cried out that the multidimensional challenges affecting the manufacturing sector in Nigeria forced 767 manufacturing companies to shut down in 2023.
The Association added that another 335 manufacturing companies also became distressed, while the capacity utilisation in the sector has declined to 56 percent. It said inventory of unsold finished products has increased to N350 billion and the real growth has dropped to 2.4 percent.
This is because the purchasing power of the citizens has fallen to the lowest ebb. The consequence of all these is that tax revenue is shrinking despite the multiple taxes being imposed by the present administration.
This is the reality on ground and the government is already feeling the heat.
For example, the Accountant-General of the Federation (AGF), Mrs. Oluwatoyin Madein recently told members of the House of Representatives Committee on Finance, that the federal government missed its revenue target of N2.69 trillion for the first quarter of 2024, by as much as 745 percent.
Madein said that the federal government revenue inflows amounted to only N318.5 billion in the first quarter of 2024.
For a country already struggling with high budget deficit, high debt burden, exchange rate crisis and galloping inflation, this is a cause for concern. The federal government in the 2024 appropriation, projected a budget deficit of N9.18 trillion. However, the government did not make any appropriation for fuel subsidies in 2024, which it now pays, though unannounced.
The International Monetary Fund (IMF) recently in its staff report on Nigeria, stated that Nigeria’s budget deficit would increase beyond the projected figure for 2024 due to implicit fuel and electricity subsidy payments and increased interest costs on debt.
IMF noted that the suspension of excise duties in the Medium Term Expenditure Framework (MTEF) and lower revenues from oil and gas sales are part of the drivers of the projected increase in budget deficit.
Experts agree that Nigeria’s current economic crisis is multifaceted and the authorities need to thread with caution.
For instance, they said rate hike is intended to make borrowing more expensive, which can help curb consumer spending and investment and thus reduce inflationary pressures. However, according to them, higher rates also come with potential downsides, including that it can slow economic growth and potentially lead to a recession; increase the cost of servicing debt for businesses and individuals, potentially straining their finances, and may not be as effective against certain drivers of inflation, such as supply chain issues or geopolitical factors.
On the flip side, they say keeping the rate as it is could provide some relief to borrowers and businesses but may not be sufficient to rein in stubborn inflation, and risks allowing inflationary expectations to become entrenched, making it harder to control in the long run.
They suggest that if the MPC will seriously consider further rate hikes, they should be carefully calibrated and communicated to minimize the negative impact on growth, adding that rate hikes should be complemented by other policy efforts.
A Professor of economics at Lead City University, Ibadan, Professor Godwin Oyedokun said there is no easy solution, and the MPC will have to weigh carefully the trade-offs involved. “But a comprehensive, coordinated policy approach stands the best chance of bringing inflation under control without unduly harming the economy,” he said.
He said the fiscal authorities should provide support for low-income households to offset the impact of higher prices.
According to him, “The government should make investments in improving supply chain resilience and productivity to address structural bottlenecks. The government also need to carefully manage government spending and deficits to avoid fueling further inflation.
“Of course, there should be coordination between monetary and fiscal policies to tackle the multi-faceted challenge of persistent inflation. The MPC and fiscal policymakers should work closely to ensure their policies are aligned and complementary.”
The CBN governor recently said the apex bank will keep the rates high for as long as it is necessary to force down inflation. Indicating that the bank’s single weapon against inflation is to keep the rates high and reduce money supply and thereby reduce spending.
The implications are higher borrowing costs, which will discourage borrowing for investment. “That will succeed in bringing inflation under control,” said Dr. Titilayo Fowokan. However, she added, “This can have an ultimate effect of slowing down economic activities. The rise in MPR is expected to encourage savings, but the citizens are still trying to survive from previous economic shocks of removal of fuel subsidy and exchange rate unification.”
Dr. Fowokan who is the President of the Lagos State Chapter of the Association of Certified Fraud Examiners (ACFE), said the MPC should be consodering an MPR reduction or better still keep it at the level it is rather than an increase so as not to make the economic situation of the citizens worse. “Any further strain on the economy could move more citizens into poverty and businesses to extinction,” she said.
She noted that a reduction in MPR should be advantageous at this stage as the cost of living of the citizens is rather on the high side. She said efforts should be made to dedollarise the Nigerian economic activity by discouraging the use of US Dollar as transaction currency for local contracts or payment for domestic purchase of goods and services to steglngthen the Naira.
“In the midst of the economic challenges, banks are declaring huge profits for 2023, while their customers are finding it difficult to break even. A downward review of MPR would stimulate investment, create employment, and make it cheaper for businesses to access credits. Thus, this will alleviate the pains of Nigerians as the cost of goods and services respond to the reduction in MPR,” she said.
Speaking directly to the fiscal authorities, Dr. Fowokan said, “With the present state of the economy, fiscal policy makers should review government expenditure patterns to cut down on government spending in all aspects, especially on external borrowing and recurrent overheads.
“They should consider policies that will boost the productive capacity of the country, be it at corporate or individual levels. Fiscal policy makers should consider time-bound tax incentives that encourage industrialisation, create employment, production of locally-made public goods, facilitate exports, encourage investment in green energy, and other potential economic resources that will alleviate poverty and foster steady revenue generation at both national and subnational levels.”
For the Chief Executive Officer of the Centre for the Promotion of Private Enterprise, Dr. Muda Yusuf, it is a delicate matter that demands that the CBN should do a cost-benefit analysis to see if the benefits of high interest rates outweighs the disadvantages. “For me keeping the interest rates high could significantly hurt the economy,” he said.