CBN’s Aggressive Monetary Policy Tightening And Nigeria’s Economic Growth

Recently Mr Aliko Dangote, the Chairman and Chief Executive Officer of Dangote Group, said that rising interest rate hikes would hurt local manufacturers.
Dangote made the statement at the opening session of a three-day National Manufacturing Policy Summit organised by the Manufacturers Association of Nigeria (MAN) in Abuja.
According to him, nobody can create jobs with an interest rate of 30 per cent.
“No growth will happen, no power, no prosperity. No affordable financing, no growth, no development,” he said.
Dangote’s comments came amid stakeholders’ concerns about aggressive monetary policy tightening by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN).
At its 295th meeting in May, the MPC agreed to increase the Monetary Policy Rate (MPR) for the third consecutive time from 24.75 per cent to 26.25 per cent.
After the meeting, the apex bank resolved to raise the MPR by 150 basis points to 26.25 per cent from 24.75 per cent.
The MPR is the benchmark interest rate upon which other rates are determined within an economy.
The CBN governor, Mr Yemi Cardoso, said the key focus of the committee at the meeting remained to achieve price stability by effectively using tools available to monetary authorities to rein in inflation.
He said that members observed that while year-on-year headline inflation in April rose moderately, the month-on-month measures of headline, food, and core inflation all declined significantly.
“This follows a decline month-on-month of headline and food measures in March, suggesting that the recent tight monetary policy stance of the CBN is beginning to yield the desired outcome,” he said.
He said that the MPC, however, noted that inflationary pressure continued to be driven largely by food inflation.
“The committee, thus, reiterated several challenges confronting the effective moderation of food inflation.
“They include rising cost of transportation of farm produce, infrastructure related constraints along the line of distribution network, and security challenges in some food producing areas,” he said.
Cardoso said that “exchange rate pass-through” to domestic prices for imported food items was also an impediment to taming food inflation.
He said that on-going reforms at the CBN would check rising inflationary trend and address distortions in the foreign exchange market
According to him, the apex bank was adopting an aggressive inflation-targeting through monetary policy tightening.
Dangote, however, said that no growth was foreseeable under such circumstances of high interest rates.
He also called on the government to protect existing businesses in the country, especially manufacturers, by providing an enabling environment for them to thrive.
He argued that for the government to address the challenges of unemployment, poverty and insecurity, the manufacturing sector must be empowered to function optimally.
He said that Nigeria had all it takes to develop and sustain a globally competitive manufacturing sector.
“But to do so, we must re-think our industrialisation policy. We must look to leading countries in the West and the East who are actively protecting their domestic industries.
“We must similarly enact policies to protect our domestic industries and nurture them into home-grown champions that will create the jobs and prosperity we desperately need,” he said.
Since its first MPC meeting under Cardoso as chairman in February, the CBN has hiked interest rates by a combined 750 basis points over three consecutive MPC meetings.
This saw the rates rising from 18.75 per cent in February to 26.25 per cent after the last MPC meeting in May.
The apex bank made it clear that combating Nigeria’s high inflation rate was its primary objective in 2024.
However, inflation rate which was 24.66 per cent in the last quarter of 2023 now stands at 33.95, in spite of tthe interest rate hikes.
For the CBN, the idea is to create an economy with positive real rates, where interest rates earned on investment exceed the rate of inflation.
Thus, if inflation is 20 per cent and the interest rate is 25 per cent, there is a positive real rate of five per cent.
This means that investors are seeing the value of their investment grow by five per cent per annum.
However, with inflation at above 33 per cent, according to National Bureau of Statistics, and interest rate at 26.25 per cent, there is negative real rates of over eight per cent, a scenario that discourages investors from keeping Naira assets.
Positive real rates are key reasons why central banks continually adjust interest rates to ensure that people continue to keep assets in their currency.
Apart from Dangote, other stakeholders have questioned the effectiveness of the MPR hike at taming inflation, stating that it hurts the real economy by increasing the cost of accessing capital.
A financial expert, Prof. Uche Uwaleke, described the aggressive monetary policy tightening by the CBN as overkill.
Uwaleke, who is the Director, Institute of Capital Market Studies at the Nassarawa State University, Keffi, said that inflationary pressure had persisted in spite of rates tightening.
According to him, headline inflation has remained stubbornly elevated, climbing above 30 per cent, way ahead of the CBN’s target of 21.4 per cent for 2024.
“Given the signals coming from its governor and the inflation targeting stance of the CBN, another round of tightening via the MPR should be expected.
“My personal view, however, is that the MPC should pause for now to see how the jumbo rate hikes already carried out transmit through the economy,” he said.
He said the decisions of the MPC would lead to lower Gross Domestic Product (GDP) numbers, especially from the agriculture and industry sectors, as well as a surge in unemployment levels.
The founder of the Centre for the Promotion of Private Enterprise (CPPE), Mr Muda Yusuf, said the decisions of the MPC to aggressively tighten rates would hurt the real sector which was already contending with numerous macroeconomic challenges.
Yusuf said that decisions of the MPC also posed major risks to the deposit money banks.
An economist and managing director of Dignity Finance and Investment Ltd., Dr Chijioke Ekechukwu, said that there was the need to isolate the impact of the recent tightening in order to determine whether to tighten more or retain.
“We also need to determine the impact of the other factors on the exchange rate and inflation rate,” he said.
A renowned economist, and lead consultant on private sector development to the ECOWAS Commission, Prof. Ken Ife, said that the MPR, being less than inflation, was a major challenge for investors.
“Inflation is 33.95 per cent while the lending rate is 26.25 per cent. This does not encourage investment.
“In the prevailing circumstance, private sector investment could be crowded out because if banks are forced to borrow at a high level, their lending rates will also get higher.
“So, the MPR could continue to rise while inflation continues to decline until one gets higher than the other, ” he said.
A past president of the Chattered Institute of Bankers of Nigeria (CIBN), Mr Okechukwu Unegbu, however, said that what the MPC tried to do was to take care of the problem of inflation.
According to Unegbu, there is so much cash in circulation that needs to be mopped up.
He said that the rates were not likely to last long as they were meant to check rising inflation in the short term.
“It is the best they can do for now. If inflation can be addressed and we produce more food, things will improve.
“It will also address the issue of `dollarisation`of economy,’’ he said
Unegbu, however, advised the MPC to retain all the rates in its forthcoming, 296th meeting.
According to him, this will give enough time for the economy to feel the positive impact of the existing, high interest rates.
“The government should also look inwards and ensure that we consume more of what we produce.
“This will help curb unnecessary demand for the dollar and further strengthen the Naira, ” he said.
As the CBN prepares for the 296th meeting of its MPC on July 23, stakeholders are hopeful that the committee will take more effective steps to curb rising inflation and stabilising the exchange rate.
Experts also suggest that the apex bank should slow down in its aggressive monetary policy tightening to allow for a breadth of fresh air in the manufacturing and financial sectors. NAN