Emefiele: Without CBN’s Monetary Tightening Regime, Inflation Would Have Reached 30.48% in April

Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, on Wednesday, said save for the contractionary monetary stance adopted by the bank from May 2022, the country’s inflationary pressures would have been higher by over 800 basis points.

Emefiele said without the bank’s efforts, inflation would have been 30.48 per cent, compared to the current 22.22 per cent recorded in April.

The CBN governor made the clarification against the backdrop of concerns that the continued hike in the benchmark interest rate had not helped to douse inflation.

Addressing journalists at the end of the two-day meeting of the Monetary Policy Committee (MPC) in Abuja, Emefiele said the committee noted the persisting uptick in inflation, as headline inflation (year-on-year) rose to 22.22 per cent in April 2023, from 22.04 per cent in the preceding month. He added that this amounted to a moderate increase of 0.18 percentage point.

He said the recent uptick was driven largely by the increase in both the food and core components, which rose moderately to 24.61 and 20.14 per cent in April 2023, from 24.45 and 19.86 per cent, respectively, in March 2023.

Emefiele’s assertions came as the MPC resolved to raise the Monetary Policy Rate (MPR), otherwise known as interest rate, by 50 basis points to 18.5 per cent, from 18 per cent.

The MPR is the rate at which the central bank lends to commercial banks and often determines the cost of funds in the economy.

Emefiele said the moderate hike in MPR was made to further rein in inflation, adding that the lingering insecurity in major food-producing areas; high cost of transportation driven by rising energy costs; activities of middlemen in the food distribution channels, as well as the persistence of shocks from legacy infrastructural bottlenecks, remain major drivers of the inflationary pressure.

Emefiele said if the apex bank had not taken aggressive actions along the line, inflation would have been unbearable for Nigerians currently. He declared that taming headline inflation through a hike in MPR remained at the heart of the apex bank’s policy, adding that it is a global phenomenon, which has started yielding positive results for the country.

Emefiele, however, assured that CBN would no longer be aggressive in MPR adjustment, but would maintain moderate adjustments going forward in order not to blur the gains so far achieved through prior interventions.

He said the MPC was convinced that monetary actions so far deployed had impacted positively on the economy. The CBN governor said the newly inaugurated Dangote Refinery could save the country about 20 per cent of its $25 billion annual import bill as well as attract an additional $5 billion to $10 billion in foreign exchange into the country.

He further pointed out that with the country’s new local refining capacity, the time was ripe for the federal government to finally eliminate petrol subsidy.

Emefiele made a passionate appeal to Africa’s richest man, Alhaji Aliko Dangote, to ensure that petrol was sold at a cheaper price to Nigerians, given that the CBN and the federal government had helped in funding the new refinery.

“He (Dangote) is a Nigerian and I am sure he will take measures to make for cheaper fuel,” Emefiele said.

Emefiele expressed worry over the country’s low level of oil production, which he said had been hovering around 1.1 million barrels per day (mbpd). He said though the oil sector still accounted for much of the government’s revenues, it had not “contributed much into accretion of reserves in over two years.”

The CBN governor, who read the committee’s communiqué, said the key policy dilemma at the meeting was whether to hold or hike the policy rate marginally to offset the moderate increase in headline inflation. He said considering the option of a hold policy, the committee reiterated the empirical counterfactual evidence of a “do-nothing” and believed that the rate hikes had, indeed, helped to moderate the continued rise in inflation, albeit, month-on-month.

He said the evidence revealed that the policy rate hikes had also moderated growth in new credit and reduced the pent-up aggregate demand contributing to the inflationary pressures.

Emefiele said MPC members were unanimous in their conclusion that the current policy stance was, indeed, impacting the targeted parameters and yielding the expected outcome, although slowly.

He stated, “Reviewing the argument to further hike the policy rate in a bid to subdue aggregate demand, members noted that the current uptrend in inflationary pressure was driven by a combination of both demand and supply side issues.

“The MPC observed the continued upward risk to price development driven primarily by expectations of rising energy and food prices; unabating security challenges in food-producing areas; as well as persisting exchange rate pressure.

“The committee, thus, felt it was expedient to continue to address the demand-side issues falling within the ambit of its policy tools. The balance of the argument, thus, leaned sufficiently in favour of a further hike (albeit less aggressively), considering the adverse impact of rising inflation on real income.”

Emefiele said the MPC, therefore, opted to tighten, though moderately, so as to indicate the committee’s conviction that the current policy stance was moderating the rising inflation, albeit month-on-month. He said sustaining the stance would consolidate the gains made so far as well as support the efforts toward moderating the demand-pull inflation, as cost of funds increased and discouraged further build-up in aggregate demand, in the face of declining output growth.

He added that the decision to raise MPR was borne out of the need to further narrow the negative real interest rate gap and moderate the associated consequences, including discouraging domestic savings mobilisation and waning investors’ confidence.

Emefiele said the moderate rate hike would effectively moderate the monetary phenomenon in the current drivers of inflation by tapering both economic and financial conditions. It would also sweep-up excess liquidity in the system and boost the bank and committee’s credibility, following the earlier forward guidance to continue to tighten when confronted with unabated rising inflation.

Emefiele pointed out that the MPC was concerned that despite the tight monetary policy stance adopted since its May 2022 meeting, inflation had not decelerated towards the bank’s long-run objective. He stressed that the continued rise in headline inflation, albeit moderately, remained the biggest challenge confronting macroeconomic stability in the country.

The CBN governor said, “Headline inflation, in the view of members, remained high due largely to a host of non-monetary issues outside the reach of the central bank, such as the perennial scarcity of Premium Motor Spirit (PMS) and expectations of short-term hikes in the pump price of PMS; high and rising price of various energy sources; and a host of headwinds confronting the food supply chain.”

The MPC, therefore, urged the fiscal authority to explore other avenues to expand the fiscal safety net in an urgent bid to improve its ability to respond to legacy and emerging shocks.

Emefiele stated non-oil revenue sources, such as the expansion of the tax bracket, would enable the reduction of fiscal deficit and public debt to improve fiscal space.

Emefiele also expressed concern over the country’s low level of oil production, lamenting that it has been hovering around 1.1 million barrels per day (mbpd). He said though the oil sector still accounted for much of the government’s revenues, it had not “contributed much into accretion of reserves in over two years”.

The CBN governor said it was rather shocking that production was still at 1.1mbdp, adding that this represents a “dangerously low level of production and export for Nigeria given that what OPEC quota gives us is 1.8 million barrels per day”.

He said every well-meaning Nigerian must demand answers from NNPC, as the development portends grave danger for the country, especially, amid strong calls for subsidy removal.

Emefiele said, “We are facing these kinds of shortfalls and we know that NNPC is facing its own various challenges, but I think it’s time for all of us to fold up our sleeves and get on board with NNPC and say, what is causing all these.

“We need to be able to round up production effectively to 1.8 mbpd, plus condensates, maybe above 2.3mbpd, and if we do not do this, I think we are really looking at real problem ahead of us, particularly, at a time when there is a concerted determination to exit the subsidy regime.

“There is danger ahead and we must do something immediately.”

James Emejo

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