Monetary Tightening Amid Rise in Food Prices

In this piece, James Emejo notes that the Central Bank of Nigeria (CBN) has doubled down on its monetary tightening regime by raising the benchmark interest rate for the second time in a row under the new management led by Mr. Olayemi Cardoso. However, with the recent moderation in FX, Nigerians are eagerly awaiting a commensurate reduction in prices of consumer goods.

The current economic hardship occasioned mainly by the removal of petrol subsidy and floating of the Naira, and an aggressive monetary tightening regime, has no doubt affected price stability in the country in recent times. The resulting foreign exchange crisis had seen prices of basic commodities skyrocket amid high energy costs. The undue pressure on the Naira, attributed to marked increase in dollar demand had further heaped undue pressure on the local currency. However, the FX crisis appeared to have remarkably improved within the past three to four weeks following the off-setting of verified FX backlogs by the Central Bank of Nigeria (CBN) among other initiatives. Amid the rising prices of goods in the country, traders and policy makers had blamed the development on the high exchange rate to the US dollar which hit an all-time of N1,800/$. Today, the CBN had been successful in reversing the high exchange rate to below N1,300/$.However, Nigerians are particularly worried that despite the crash in the exchange rate, food items and other commodities have remained at their levels when the FX rate was highest in the country.

CONTRACTIONARY POLICY REGIME

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) recently at its last meeting in March, raised the Monetary Policy Rate (MPR), the benchmark interest rate by 200 basis points to 24.75 per cent from 22.75 per cent. The bank also reversed the asymmetric corridor around the MPR from +100/-700 basis points to +100/-300 basis points. While the CBN retained the Cash Reserve Ratio (CRR) of Deposit Money Banks (DMBs) at 45.0 per cent, it however, jerked up the CRR of Merchant Banks (MBs) from 10 per cent to 14 per cent, and left the Liquidity Ratio (LR) unchanged at 30.0 per cent. CBN Governor, Mr. Olayemi Cardoso, said the decisions of the committee further underlined the urgency on the part of the apex bank to, “bring inflation under control to ensure that the purchasing power of ordinary Nigerians is restored in the short to medium term.”

It was the second consecutive rate hike by the reconstituted MPC led by Cardoso and came as a surprise to many analysts who had predicted that the apex bank would possibly hold the rates at their levels before the meeting and allow the effects of the previous policy adjustments permeate the system. During its February 27, 2024 meeting, the first to be superintended by Cardoso, the apex bank jolted the markets and beat analysts’ expectations when in one fell swoop, it raised the Monetary Policy Rate (MPR) by a whopping 400- basis points to 22.75 per cent from 18.75 per cent – at a period of biting economic hardship occasioned mainly by the removal of fuel subsidy and floating of the Naira. The bank also adjusted the asymmetric corridor around the MPR to +100/-700 basis points from +100/-300 basis points, and further raised the CRR of DMBs to 45 per cent from 32.5 per cent as well as retained LR at 30 per cent. Given that the MPR is the rate at which commercial banks borrow from the central bank and often determines the cost of funds in the economy, the continuous interest rate hikes meant more hardship for Nigerians as prices continued to prices because manufacturers incur additional expenses in their production chain, leaving the consumer to bear the brunt.

However, Cardoso had justified the continuous rate hike, highlighting the need to anchor inflation expectations as well as ensure sustained exchange rate stability.

According to him, the MPC was faced with the option of either progressing with its tightening cycle or hold, to observe the impact of the previous rate hike and adjustment of CRR, adding that after reviewing the balance of risks and the near-term inflation outlook, members were convinced of the need to progress with the tightening cycle.

The committee observed that the continued rise in headline inflation, was driven largely by food prices occasioned by supply shortages and high cost of logistics and distribution, stressing that addressing food insecurity remained key to containing current inflationary pressures, and therefore, called for the full implementation of the federal government’s agricultural policies and programmes to improve food supply.

The committee particularly commended the ongoing efforts of the federal government towards addressing food insecurity, including the provision of various palliatives, release of grains from the strategic reserves, distribution of seeds and fertilisers, as well as farm implements for dry season farming.

SIGNIFICANT MODERATION IN FX

If anything, the MPC also noted with satisfaction the level of stability achieved in the foreign exchange market in the last few weeks, attributing it to the impact of the apex bank’s recent policy actions and reforms, as well as increased transparency in the market – and commended the efforts of the bank in offsetting verified foreign currency obligations, an action it believed would greatly enhance investor confidence and attract foreign investments to the country.

*WHEN WILL PRICES DROP?

Apparently aware of the concerns and sufferings of Nigerians, Cardoso, however, assured that the current contractionary policy stance of the apex bank may not be long-drawn out as the CBN expects moderation in inflation from May – though MPC was poised to further adjust rates according to the response from its current intervention. The CBN governor further stressed that the central bank was not oblivious of the impact of interest rate hikes on the economy adding that its successes in the moderation of FX rates was also translating in the reduction in lending rates and costs in the economy.

However, despite alluding to the fact that there has been a reduction in lending rates, this was yet to reflect on basic prices of food and other essential commodities till date – a development that had kept Nigerians worried.

FX AND PRICE MODERATION

Generally, it makes economic sense for the CBN to raise interest rates to make it difficult to access funds, thereby further reducing the purchasing power of Nigerians in a bid to fight inflation. By doing so, sellers of goods will be forced to drop their prices when the patronage is low. But this is yet to happen as prices are still at the ceiling despite FX moderation to about N1,250/$ or below. Experts believed that in an ideal situation, FX moderation could lead to price moderation, especially in countries that rely heavily on imports for goods and services. The relationship between FX rates and domestic prices, often reflected through inflation rates, is a key aspect of international economics. In addition, a stable FX rate environment provides the central bank with more leeway to implement monetary policies aimed at controlling inflation without the immediate concern of defending their currency.

This could include adjusting interest rates to optimal levels for economic growth without the added pressure of countering currency devaluation, which can sometimes exacerbate inflationary pressures.

ANALYSTS’ PERSPECTIVES

However, analysts have attempted to explain the possible reasons why a significant moderation in FX rate had not led to reductions in prices of basics items, which were initially raised as a result of high exchange rate. The analysts believed that until the sellers sell off the items impacted by the high FX rate, the prices are unlikely to drop in the short-term. They said apart from FX rate, other variables including energy costs and insecurity as well as production costs play their parts in determining prices.

Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr. Chijioke Ekechukwu, said FX moderation was unlikely to impact prices of goods and services in the short run.

He said, “This is because, business men are still having stock of goods bought with the higher exchange rate and will take some time to ease.

“Secondly, there are other factors that are affecting prices other than FX. Factors like high prices of petroleum products, high tariffs, high energy cost, and insecurity and general high cost of production.”

Ekechukwu added, “In my opinion, the reason for the moderation of the FX is mainly due to the resumption of intervention by the CBN in that market. In other words, the supply of foreign currencies increased in a more regulated manner. The increase of MPR and CRR of Merchant Banks may have contributed to the moderation, but not significantly.”

On his part, Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, said, “The price of goods and commodities cannot immediately drop due to the continuous strengthening of the Naira because some purchases and positions taken to procure goods and services when the value of US dollars was high has not been exhausted.

“The cost of other factors of production for example petrol and diesel for transportation and energy support has not reduced. The federal government should intensify its approach in ensuring that its plan for the economy in granting loans to the productive sector like manufacturing companies, MSMEs and others are quickly implemented to oil the economy.

“The agricultural sector revolution plan should also be given the desired support it requires so that we can attain food security and economic recovery as fast as possible.”

According to Gbolade, “The CBN massive tightening regime was not the only measure that enabled FX to moderate significantly, other measures like the recent arrest and prosecution of companies and individuals manipulating the FX exchange rate and more stringent regulations of the BDCs went a long way in moderating the FX.

“We have started seeing more capital inflows and investment into the country. These measures need to be supported by creating a more enabling environment to do business and ensuring more ease of doing business in Nigeria.”

Also, Wealth Management and Business Development Consultant, Mr. Ibrahim Shelleng, said the effects of the recent policy initiatives of the CBN will not be immediate at bringing down prices due to the effects of previously high buying costs.

He said the inventory that was bought at the elevated dollar prices will be sold at higher prices to ensure traders do not make losses. Shelleng said, “Another aspect that must be considered is the high cost of domestic borrowing. The high cost of capital for the private sector and increased yield in government securities raises the domestic debts levels. Although it could be argued that domestic debt is easier to manage than foreign debt due to no FX volatility.

“It seems that the CBN has forfeited domestic growth and is focusing on stabilisation of the exchange rate as a means to tackling the inflationary pressures. It is no secret that we are a massively import dependent nation. Therefore, by maintaining a stable currency, the CBN aims to gradually reduce inflationary pressures and bring about price stability.”

Further commenting on the development, President, Association of Capital Market Academics of Nigeria, Prof. Uche Uwaleke, the CBN’s tightening regime seeks to lure foreign portfolio investors at all costs which was why the apex bank was focusing on increasing short term interest rates.

He said, “The reality is that the cost to the economy is huge as access to credit is constrained and finance costs for firms increase leading to higher costs of production which are equally passed on to consumers.

“This partly explains why prices of commodities are generally on the rise despite the jumbo MPR hike and moderation in exchange rate.

“There’s equally the fact that inflation drivers in Nigeria comprise significant non-monetary, supply-side and structural factors all of which are outside the control of the CBN. These include insecurity especially in food belt regions where farmers have stopped going to farms, rising energy costs, both fuel and electricity, as well as transport challenges.

“Uwaleke said, “All these affect food productions which is why the inflation pressure point is on food with the food index accounting for over 50 per cent of the headline inflation of 31.7 per cent.

“Against this backdrop, the CBN’s approach to tightening should be measured and incremental with due regard to policy impact on economic growth given that the economy is actually facing the challenge of stagflation.

“It goes without saying that the inflation battle cannot be won by the CBN alone. The government should complement the efforts of the monetary authority by tackling insecurity and ensuring that the oil refineries come alive to reduce imports and ultimately the domestic prices of petroleum products.

“The recent increase in electricity tariffs is another inflation trigger. The implementation of electricity tariff hike is best done at a time of low inflation.”

However, many Nigerians believe it is only a matter of time, if the currently elevated prices of goods and commodities come down as predicted, especially given that whatever goes up in the country in terms of prices, hardly comes down.

“Against this backdrop, the CBN’s approach to tightening should be measured and incremental with due regard to policy impact on economic growth given that the economy is actually facing the challenge of stagflation.”