The fight against inflation entered new phase with the Central Bank of Nigeria (CBN) decision to adopt inflation targeting framework to price stability. The inflation targeting framework- already implemented by central banks of several African countries- will strengthen Nigerians’ purchasing power, disposable income, drive aggregate demand and stimulate production. The CBN will also be conducting in-house modeling and simulations of economic variables to ensure its core mandate of price stability is achieved and growth in the economy replicated in stronger purchasing power for the people.
The devastating effects of rising inflation are felt by households and businesses across the nooks and crannies of the country.
That is why price stability is one of the core mandates of the Central Bank of Nigeria (CBN), which has adopted inflation targeting framework to bring inflation under check.
The inflation targeting framework, which replaces the exchange rate targeting framework, will be implemented with the backing of the people.
As part of the preparations to ensure its success, the CBN Monetary Policy Department held the 2022/2023 Annual Retreat in Lagos where stakeholders pointed way forward for Nigeria’s journey to price stability.
CBN Director, Monetary Policy Department, Mahmud Hassan , said moving from exchange rate targeting framework to inflation targeting framework aligns with the apex bank’s determination to bring inflation upsurge under control in line with its price stability mandate.
He said inflation uptick has remained a major concern to the CBN and now is the time to use all monetary policy tools to bring it under control.
Already, data from the National Bureau of Statistics (NBS) showed that marginal increase in headline inflation (year-on-year) in March 2023 to 22.04 per cent; February 2023 to 21.91 per cent from 21.82 per cent in January 2023.
Also, broad money supply (M3) which is a key ingredient in inflation uptick grew by 13.14 per cent (annualized) in February 2023 (year-to-date), below the 2023 provisional annual benchmark of 17.18 per cent.
This was driven largely by the growth in Net Foreign Assets (NFA), which was attributed to the increase in foreign asset holdings of the CBN and decrease in foreign claims on Other Depository Corporations (ODCs).
Speaking on the theme: ‘Monetary Targeting Policy Framework in Nigeria – An Appraisal of its Continued Relevance to the Price Stability Mandate’ , Hasssan disclosed that monetary policy has had to contend with shocks including the global financial crisis.
The event was attended by Jack Ree, from the International Monetary Fund; Prof Robert Mudida, Director of Research, Central Bank of Kenya (CBK); and Dr. Philip Abradu-Otoo, Director of Research, Bank of Ghana (BoG); staff of the monetary policy department of the CBN, among other stakeholders.
Hassan said the various oil price shocks, Covid-19 pandemic, and most recently, the war between Russia and Ukraine have resulted in various shocks to the global economy, requiring changing responses to subdue both the monetary and fiscal authorities in the advanced and emerging market economies.
To address these shocks, he said the CBN migrated from an exchange rate targeting framework to phased migration to inflation targeting framework.
He said the CBN has been controlling the growth of the money supply to achieve price stability but over time, the effectiveness of that strategy in achieving price stability in Nigeria has been called into question.
“One of the main challenges has been the difficulty of accurately measuring and controlling the money supply in the face of financial innovation and the growth of non-bank financial institutions. In addition, the relationship between the money supply and inflation has become less predictable in recent years, further complicating the use of monetary targeting as a policy tool,” he said.
Hassan added: “Ultimately, the central bank will need to interrogate the continued relevance of the monetary targeting framework to address the series of new and developing shocks impacting the Nigerian economy, as well as the advantages the inflation targeting framework may hold for us as a central bank”.
Also speaking CBN Deputy Governor, Economic Policy Directorate, Dr. Kingsley Obiora, said economies have witnessed harsh economic conditions which they had to deal with over the past few years.
He said crude oil prices have fluctuated significantly over the past few years, making managing the exchange rate and inflation significantly difficult for monetary policy.
He explained that at inception, the CBN adopted an exchange rate targeting framework with the Nigerian Pound exchanging at parity to the British Pound Sterling. The policy target under this framework was the maintenance of the viability of the Balance of Payments (BoP) and controlling inflation in the domestic economy.
Obiora said that in today’s economy, rapid technological advancements and increasing competition are changing not only the way we do business but also the definition of money.
“The rapidly changing macroeconomic environment has meant that the continued reliance on money supply growth as a reliable guide to the trend of price development has become questionable, not just among central bankers but also among academics,” he said.
Obiora said the relationship between money supply growth and the money multiplier has become increasingly blurred due to the observed instability in the money multiplier, making it difficult to set appropriate targets for money supply growth.
“It has become pertinent against this backdrop for the CBN to consider the pros and cons of a transition to a new monetary policy framework in a bid to improve our ability to continue to anchor inflation expectations,” he stated.
Headwinds persist
The increasing headwinds at home and abroad constitute major reason for the inflation targeting framework. For instance, the Monetary Policy Committee (MPC) met on 20th and 21st March, 2023, faced with new and existing headwinds, undermining the full recovery of the global economy.
The CBN in March raised the benchmark lending rate to 18 per cent in an aggressive push to contain the nation’s inflationary pressure.
In January, the MPC raised its benchmark lending rate from 16.5 percent to 17.5 per cent in a sustained push to control inflation and ease pressure on the naira.
Speaking during the meeting, CBN Governor, Godwin Emefiele said listed the headwinds as the recent bank failures in the United States and Switzerland, amidst widespread monetary policy tightening, which introduced a new dimension to the risks confronting the global financial system, as well as, the persisting high but receding global inflation.
He said the continued hostilities between Russia and Ukraine and its implications to the smooth functioning of the global supply chain also remain a critical strain to the recovery of global output growth.
He disclosed that in the domestic economy, output recovery progressed at a relatively moderate pace, while headline inflation trended upwards, albeit less aggressively, driven mainly by a marginal increase in food inflation.
Growth vs price stability
Data from the National Bureau of Statistics (NBS) showed that Real Gross Domestic Product (GDP) grew by 3.10 per cent in 2022.
In the fourth quarter of 2022, it grew by 3.52 per cent (year-on-year), compared with 3.98 per cent in the corresponding period of 2021 and 2.25 per cent in the preceding quarter. The economy maintained a positive growth trajectory for nine consecutive quarters, since exiting recession in 2020.
The improved performance was driven largely by sustained growth in the services and agricultural sectors, a rebound in economic activities associated with economic recovery and continued intervention in growth enhancing sectors by the Bank. Staff projections showed that output growth recovery is expected to continue into 2023 and 2024.
Data on CBN’s interventions in domestic economy, showed that between January and February 2023, the apex bank disbursed N12.65 billion to three agricultural projects under the Anchor Borrowers’ Programme (ABP), bringing the cumulative disbursement under the Programme to N1.09 trillion to over 4.6 million smallholder farmers cultivating or rearing 21 agricultural commodities on an approved 6.02 million hectares of farmland across the country.
The bank also released the sum of N23.70 billion under the N1.0 trillion Real Sector Facility to eight new real sector projects in agriculture, manufacturing, and services. Cumulative disbursements under the Real Sector Facility currently stands at N2.43 trillion, disbursed to 462 projects across the country, comprising 257 manufacturing, 95 agriculture, 97 services and 13 mining sector projects.
Under the 100 for 100 Policy on Production and Productivity (PPP). The bank also released N3.01 billion under the Nigerian Electricity Market Stabilisation Facility (NEMSF-2) for capital and operational expenditure of distribution companies (Discos) aimed at improving their liquidity status and aid their recovery of legacy debt. This brings the cumulative disbursement under the facility to N254.39 billion.
According to Obiora, inflation is not an end, but means to an end adding that output should be meaningful to the people.
“We are dealing with slow growth but high inflation. Aggressive monetary policy tightening is happening but it is having adverse effects on banks at the global arena. The three banks that collapsed in the US are phenomenal. In all of these, Nigeria financial system is still stable,” he said.
For instance, what started with the collapse of Silicon Valley Bank on March 10 was followed by strains in other US regional lenders before the failure of Credit Suisse a week or so later and most recently of the US’s First Republic.
According to him, Nigeria has had double digit inflation in the last eight to nine years, raising questions on whether monetary policy is helping to moderate inflations.
He said now is the time to change to a new model that will address inflation fears for the economy.
Emefiele speaks on inflation spike
Emefiele had last year lamented rising spate of inflation and the impact of foreign exchange shortage on achieving national development goals.
For him, inflation rate is at an unacceptable level and higher inflation needs to be tackled with tools that can potentially constrain the economy’s fragile output growth and cause stagflation.
Emefiele explained that due to the resumed uptick of inflation rate in February 2022, the MPC raised its policy rate several times adding that the monetary policy tightening measures have led to subdued aggregate demand pressures expected to ease inflation.
He explained that the combined efforts of the monetary and fiscal authorities to ramp up food supply and tackle age long structural challenges are also expected to moderate inflation expectations and drive down food and core prices in the medium-term.
Raising fears over monetary policy tightening, a staff of Finance & Development of World Bank, Marjorie Henriquez, said central banks tightening monetary policy should expect loan defaults within their economies.
In a report titled: “Early Lessons from Recent Banking Turmoil”, Henriquez advised central banks against monetary policy tightening adding that the central banks should adopt other tools to achieve price stability.
She said the short-term interest rate is the principal instrument in a tightening cycle, and a liquidity injection can be implemented to deal with financial stability problems without jeopardizing price stability.
In recent years, central banks have proactively intervened as liquidity providers and learned to do this in a timelier manner than in the past.
Other analysts recommended that a broad-based harmonisation of fiscal and monetary policies towards addressing the identified structural constraints raising inflation figures will significantly help to moderate inflationary pressure in the medium term.
