The Central Bank of Nigeria aggressively raised the monetary policy rate by 400 basis points to land the interest rate benchmark at 22.75 percent from 18.75 percent in an ambitious move to crash Nigeria’s elevated inflation rate.
Experts describe the rate hike as overkill with the capacity to shrink output and drive the number of non-performing loans (NPLs) northwards.
At its first meeting since July 2023 when the last Monetary Policy Committee meeting was last held, the central bank also adjusted the asymmetric corridor around the MPR to +100/-700 from +100/-300 basis points. It raised the cash reserve ratio from 32.5 per cent to 45 per cent; and retained the liquidity ratio at 30 per cent.
CBN governor Olayemi Cardoso said the rate hike is part of the bank’s commitment to reverse the inflationary trend currently at 29.9 percent as the balance of risk leaned towards rising inflation. However, experts say the new CBN direction will lower GDP numbers, especially from agric and industry sectors and a surge in unemployment levels. “This is not a welcome development,” said a professor of capital market at Nasarawa State University, Uche Uwaleke.
Many believe that the new move will make banks quickly reprice their loans with negative consequences for non-performing loans and financial soundness indicators.
Nigeria is battling multifaceted economic woes driven by general price hikes because of the removal of fuel subsidy that has seen a litre of fuel sold for N680, fiscal deficits, float of the naira currency and widespread insecurity that has caused severe disruptions to the food supply chain.
Cardoso however said, the apex bank is not responsible for the current hardship that Nigerians are facing, even as he said the country does not have the opportunity of making a wrong turn.
Cardoso, whilst answering a question by LEADERSHIP at the end of the MPC meeting in Abuja absolved the CBN of any part in the current woes of the country. Currently, inflation figures are on the brink of 30 per cent with food inflation nearing 40 per cent.
This is coupled with a highly volatile exchange rate that had seen the value of the naira plummet to N2000 to the dollar in recent times.
The CBN governor stated that, “we at the CBN are not responsible for the woes of today. We are part of the solution and are determined to work to get out of the mess that the country is in. We assumed responsibility at a time when there was a crisis of confidence. We cannot turn back the clock. All we can do is to do the difficult things to make a bad situation better,” he said.
12 members of the MPC chaired by Mr Olayemi said the decision to transition to an inflation targeting framework was essential to addressing the persistence of inflationary pressures in the economy and commended the fiscal authority for their invaluable support.
“Members are convinced that the ongoing reforms in the foreign exchange market will yield the desired outcome in the short to medium term. The central bank had undertaken measures to achieve the unification of the foreign exchange market; promotion of a willing buyer willing seller market; removal of all limits on margins for IMTO remittances; introduction of a two-way quote system and the broad reforms in the BDC segment of the market to restore stability, enhance transparency, boost supply, and promote price discovery in the Nigeria Autonomous Foreign Exchange Market (NAFEM),” he stated.
The reforms are yet to yield the desired result as the naira still exchanges for about $1/ N1,500.
However, Cardoso bragged that the reforms have resulted in helping to raise the bank’s foreign reserves to $34 billion in recent times, indicating the restoration of confidence in the forex market.
Mr Cardoso also said the central bank will now have zero tolerance for people who flaunt or fail to comply with its regulatory guidelines. He said those who fail to obey its guidelines will be severely punished. “The central bank is moving to a very aggressive regulatory environment. So, tolerance for people who fail to comply will be zero. People will face the consequences of non-compliance,” he said, adding that his administration has resolved to make the market more liquid.
He said the apex bank has also paid another $400 million to verified and genuine pending forex requests in a determination to clear the backlogs.
The central bank is also planning to increase the licence fee for Bureau De Change operators to between N500 million and N1 billion, depending on the area of coverage. Mr Cardoso said his administration will strengthen surveillance on the BDCs to prevent rent sinking in the market.
The MPC CBN to increase system buffers by recapitalising the banks to improve resilience against potential risks. The members further enjoined the Bank to strengthen surveillance and compliance regarding its earlier guidance on the application of foreign exchange revaluation gains.
He also disclosed that the bank recorded about N10 trillion exposure in the form of intervention programmes in the various sectors of the economy under the administration of former CBN Governor Godwin Emefiele apart from the N23 trillion lent to the federal government through Ways and Means. He said that helped to fuel inflationary pressure in the economy. He however promised to ensure full recovery of the funds.
Professor Uwaleke said the apex bank should have raised the MPR by not more than 200 basis points since they have another opportunity to meet next month and review the impact.
The monetary policy committee of the CBN didn’t stop at MPR, they also jerked up the CRR to 45 per cent which at the previous level of 32.5 per cent was among the highest in Sub-Saharan Africa.
The CBN governor had assured that the policies of the bank would be evidence-based. Which empirical results support this aggressive move?
“I pity the real sectors of the economy. The implication is that for every deposit in the bank, CRR takes 45 per cent of it while Liquidity ratio takes 30 per cent. So it is only 25 per cent of the deposit that banks can lend!
“This has negative implications for access to credit, cost of capital for firms, cost of debt service by the government and asset quality of banks,” he said in a reaction to the policy decision of CBN on Tuesday.
