The Senior Partner and Chief Economist at SPM Professional, Paul Alaje and Nigeria’s first professor of Capital Market Studies, Uche Uwaleke have warned that the tinkering of the Monetary Policy Rate by the Central Bank of Nigeria will not moderate inflation citing that over 60 per cent of the country’s inflation is non-monetary.
Speaking to NewsNGR, Alaje argued that hiking MPR will crowd out investment, create poverty and stagnate the Nigerian economy.
Alaje gave the advice on Monday ahead of the CBN Monetary Policy (MPC) decision on Tuesday.
Nigeria’s inflation rose to 34.19 per cent while food inflation jumped to 40.8 per cent in June despite the central bank’s monetary hikes.
At the last MPC meeting, the bank raised MPR, which is a benchmark interest rate to 26.25 per cent.
Alaje said the country is not achieving results because the CBN is focusing on the monetary causes of inflation.
Alaje said, “The bottom line is that when you have a non-monetary inflation and you are trying to solve it with a monetary inflation approach, it will cause further problems. Nigeria’s case has largely, non-monetary inflation.
“The National Bureau of Statistics, the real cause of inflation is food inflation. So, you have increased MPR from the former CBN governor to the present governor why has it not solved the problem?”
Alaje explained that the CBN is not getting it right because the country’s inflation is mostly non-monetary.
He said, “Those leading our monetary team need to upgrade their knowledge. N100tn last year is not the same as N100tn this year because of the kind of inflation. So, when you now raise the interest rate and banks tell people to pay more for loans, you end up energizing inflation and you will be forced to devalue. So, it becomes a roller-coaster because you are not separating issues and solving issues.
“CBN will need to call on authorities that are non-monetary to face the non-monetary components of inflation. If not the CBN will be using monetary tools to fight non-monetary related inflation which includes shortage of food, insecurity and seasonal-induced inflation.
“You can’t rely on monetary tools such as adjusting MPR, increasing Cash Reserve Ratio (CRR) and increasing Liquidity Ratio to solve the problem. When you do, the economy will stagnate. It means that we will not go above 3.5 per cent.
He said the country has always used monetary tools to combat inflation that has over 60 per cent of non-monetary components.
In his comments, Uwaleke said the CBN may raise MPR by at least between 50 to100 basis point.
The University professor said the MPC will still be concerned about the need to narrow the negative interest rate as well as curtail the pressure in the forex market.
Recall that NewsNGR reported the CBN resumed foreign exchange sales to authorised banks and Bureau de Change operators over pressure on the naira.
“Nevertheless, if I were a member of the MPC, I would vote for a hold position as the aggressive policy rate hike is taking a toll on output. Production is stiffled because of very high cost of funds.,” Uwaleke said.
Just like Alaje, the professor warned that the seeming over reliance on the MPR as a tool to tame inflation does not appear to be making any meaningful impact due to the significant non-monetary factors driving inflation in Nigeria.
Uwaleke said, “The high cost of credit is also a factor contributing to cost-push inflation. This is due in part to a very high CRR of 45 per cent representing sterilised Bank deposits with the CBN.
“This liquidity squeeze is now driving undue pressure by banks on the CBN’s Standing Lending Facility.”
He said the CBN must recognise that the challenge currently facing the Nigerian economy is not just inflation but stagflation.
“To this end should equally have regard to growth concerns in future meetings of the MPC,” he added.