Nigeria Economic Activities: Inflation, Interest Rate and CBN Meeting

by Emeka Chiakwelu

Nigeria Economic Activities: Inflation, Interest Rate and CBN Meeting
Inflation rate at 12.9%, Central Bank of Nigeria (CBN) retains interest
rate at 12 percent. But economic activities are becoming unpredictable.

The two-day meeting of Central Bank of Nigeria’s Monetary Policy Committee
(MPC) ended with a lukewarm outlook, projection and pronouncement on the
state of the economy by the Governor Sanusi, the head of the country’s
apex bank. Sanusi noted that national economic growth may encounter some
hiccups in the absence of “structural reforms”. The head of the country’s
Reserve institute buttresseed his comment by pointing to the slight
reduction of the economic growth from 7.45 percent in 2011 to the
projected 6.5 percent for 2012.

It may not be fair to the monetary policy committee to ascribe the
two-day summit as futile and ineffective but that may be the case. Before
the meeting there were already standing facts that remained unchanged. At
a whopping 12 percent interest rate, even at the face of the surging
inflation rate at 12.9 percent, Central Bank of Nigeria (CBN) cannot
afford to jack-up the interest rate.

The tightened of monetary policy to mop up liquidity in the monetary base
may have become unresponsive and waned. Therefore monetary policy
committee retained the monetary interest rate at 12 percent. The further
hiking of the interest rate may result into unintended consequences. A
higher interest rate may probably appreciate capital market, but at same
time, it will constrict credit and liquidity in the hands of business
community. And such a scenario and development comes with the slow down of
economic growth. It is beginning to look like, that the interest rate at
12 percent is gradually slowing down economic growth.

Moreover the further intensification of liquidity mopping can result in
the slowing down of the economy. The only alternative left to the
monetary policy committee is to look beyond tighten of monetary policy.
The executive arm of the government should inject fiscal policy to
complement the actions of the monetary policy committee. Sanusi was
underlining the forthcoming weakness of the economy, emphasizing the
needed structural reform of the economy. Sanusi was probably alluding to
fiscal policy application.
When Asia was experiencing higher inflationary rate in 2011, at a point
monetary policy tightening was becoming waned, HSBC Global Research
advised Asia to tighten fiscal policy. HSBC Global Research stated that:

“Monetary policy, in its usual form, no longer works. Raising rates simply
draws in more capital, leaving financial conditions highly stimulative.
Currency appreciation, of the size needed to cut off those funds, would be
too disruptive. Capital controls could square the circle, but these are
never watertight. Meanwhile, to some, regulatory tightening has become a
valid alternative, yet this is difficult to calibrate and best serves as a
complementary, rather than primary, tool to tackle inflation. In short,
the hands of central bankers are tied.”

Nigeria is at a crossroad economically and the time has come for the
policy makers to look beyond the limited effect of the monetary policy.
The formulation, presence and implementation of a well planned and
coordinated fiscal policy can be the affirmative threshold needed to stem
down the surging inflationary trends.

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