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Let’s face it; CBN cannot control inflation in Nigeria

Despite Central Bank's Efforts, Inflation Climbs to 31.7%, Prompting Concerns Over Economic Stability

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By Kirk Leigh

Another uptick in the inflation rate is sending shivers down the spines of a weary Nigerian public that has endured years of escalating food prices. It is now behooving policymakers to intervene with effective short-term and long-term measures to halt the situation, now seen as a security threat to the nation.

Headline inflation jumped 1.8 percent in February to an unprecedented 31.7 percent from 29.9 percent in January, just two weeks after the Central Bank raised rates to 22.75 percent from 18.75 percent. This rise sends an urgent message to the government that things may go out of hand in the coming months if the CBN’s price stabilization efforts keep short-changing economic players.

Interestingly, the CBN has been raising interest rates in the last couple of years with the hope of muscling inflation to beat a retreat, but the result has always been the opposite. In the last three years, for instance, MPR was raised to 11.5 percent in 2022, 16.5 in 2023, and 18.75 at some point last year before bathing at 22.75 two weeks ago. Yet, in the periods alluded to, inflation has risen to an average of 18.8 percent in 2022, 28.9 percent in 2023, and is already at 31.7 percent this year.

This is clearly a situation of doing the same thing over and over again and expecting a different outcome. Perhaps the central bank doesn’t have as much control over the money supply as they have come to believe over the years. Ours is overwhelmingly an informal sector-driven economy, meaning that much of the money in circulation does not pass through the banking system. The bulk of money in circulation is in the hands of the market women; the local thrift operators, cow dealers, transporters at motor parks, corrupt politicians who put their stash under their mattresses and soak away pits in order to beat the system, and terrorists and bandits who must avoid being tracked by the authorities. Not to mention the billions of counterfeits wielded by unscrupulous persons.

Theoretically, as propounded by the monetarists; once a central bank raises rates, they discourage bank lending and effectively restrict the local currency to the vaults of the banks in what is called a mop-up. Conversely, when rates are cut, there is a flood of money in the system that eases credit and pushes money into the system by evoking the money multiplier, also known as fractional banking. But that has not been working in Nigeria, and the only explanation is that the CBN has little control. It is also the reason that, in recent times, when rates have been raised, inflation has taken off.

Given that there are other factors that also induce inflation, including a devalued naira, CBN’s Ways and Means, restricted agricultural activities from terrorism, and banditry, among others, the central bank’s use of monetary policy, given that it is powerless regarding money supply, will not even scratch the surface.

Continued application of monetary policy tools only hurts productive sectors, including manufacturing and agriculture. They get stifled with funds that are sorely needed for expansion. Ultimately, raising rates restricts the capacity for growth in the economy.

In order to put the cart and the horse in the right order, the central bank should focus instead on its financial inclusion policy, which it claims has achieved 64.1 percent as of July 2023. It is when they can achieve a true 64 percent that is not a product of our penchant for churning out bogus figures that do not reflect the true situation on the ground that they can really have significant power over the money supply.

To complement the efforts of the central bank in its quest for price stability, politicians will have to deal with corruption within their ranks, which sees them heaping their loot outside the banking system. This is because they can also use federal might to deal decisively with terror and banditry.

Kirk Leigh is the Publisher of Abuja Politico
08023943970 (WhatsApp only)

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