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Monetary policy rate fails to curb rising inflation: What’s going wrong?

Monetary policy rate fails to curb rising inflation: What’s going wrong?

The chart data indicates a significant rise in both the Monetary Policy Rate (MPR) and inflation in Nigeria from January to April 2024. The MPR increased from 18.75 percent to 24.75 percent, while inflation surged from 29.9 percent to 33.69 percent. This trend reflects the challenges of curbing inflation despite tighter monetary policies.

The persistent inflation despite increased MPR suggests other factors, such as supply chain disruptions, external economic pressures, and structural inefficiencies, are at play. This debunks the simplistic view that monetary policy alone can control inflation in contexts with significant external and internal economic disruptions.

Inflation in Nigeria has been a persistent and growing concern. Despite the Central Bank of Nigeria (CBN) taking decisive action by increasing the Monetary Policy Rate (MPR) twice this year—first from 18.75 percent to 22.75 percent in February, marking a staggering 400 basis point hike, and then from 22.75 percent to 24.75 percent in March, adding another 200 basis points—the inflation rate continues to rise.

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This raises a crucial question: why is the MPR failing to effectively curb inflation?

While MPR is among the key tools used by the CBN to control inflation, By raising the MPR, the CBN aims to reduce the money supply in the economy, making borrowing more expensive and saving more attractive.

This should theoretically reduce spending and slow inflation. However, the Nigerian experience shows that this mechanism is not always straightforward.

According to the latest data from the National Bureau of Statistics (NBS), Nigeria’s inflation rate has surged for the 16th consecutive month, reaching 33.69 percent. This troubling trend highlights the inadequacies of current monetary policy measures and suggests deeper underlying issues within the Nigerian economy.

Some experts argue that the inefficacy of the MPR to curb inflation can be attributed to unexpected events or changes that significantly affect the economy, which economists call shocks.

According to them, shocks impacting the MPR’s efficiency to control inflation in Nigeria can be either domestic or external. In the case of Nigeria, both domestic and external shocks affect the economy simultaneously.

Supply chain disruptions

Nigeria’s heavy reliance on imports for both consumer goods and industrial inputs means that global supply chain disruptions significantly affect local prices. The COVID-19 pandemic and ongoing geopolitical tensions have exacerbated these disruptions, leading to increased costs and higher inflation.

Since 2020, when the coronavirus spread worldwide, the global supply chain has been disrupted, leading to elevated inflation. The situation was further aggravated by the Russia-Ukraine war and the Israel-Hamas conflict, which have heightened inflationary risks.

 “Some experts argue that the inefficacy of the MPR to curb inflation can be attributed to unexpected events or changes that significantly affect the economy, which economists call shocks.”

At the height of the COVID-19 pandemic, activities across the globe came to a halt, with many businesses shutting down and global supply activities being severely impacted. Analysts estimate that supply shocks account for about half of the increase in the prices of manufactured goods, with the rest largely due to increased demand, according to a source from Blueprint.

While the world was still grappling with the aftermath of these disruptions, the Russia-Ukraine war began on February 24, 2022, escalating the conflict that had started in 2014.

In a report titled “Immediate and long-term impacts of the Russia-Ukraine war on the supply chain,” global services firm KPMG highlighted the immediate effects of economic sanctions imposed on Russia in response to its invasion of Ukraine.

The report noted that trade in commodities and industrial inputs from Russia and Ukraine, including wheat, oil, nickel, and palladium, has been disrupted, causing prices to soar. Additionally, transportation costs have spiked as a result.

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According to KPMG, “trade in commodities and industrial inputs that originate in Russia and Ukraine—everything from wheat and oil to nickel and palladium—has been disrupted and prices have soared. Transportation costs are spiking, too.”

This combination of disrupted supply chains and increased costs has had a profound impact on inflation in Nigeria, exacerbating an already challenging economic situation.

According to OEC.World, in 2022, Nigeria imported $3.03 billion worth of wheat, making it the 4th largest wheat importer globally. Wheat was Nigeria’s second-most imported product that year.

From January to September 2023, Nigeria’s wheat imports reached N783.26 billion, up by N28.66 billion compared to N753.60 billion during the same period in 2022.

Wheat flour is a key ingredient in making bread, pasta, noodles, and other staple foods in Nigeria. Recently, the prices of these products have increased, which can be attributed in part to the conflict between Russia and Ukraine, which disrupted global supply chains and caused a rise in wheat prices.

Exchange rate volatility

The depreciation of the naira against major currencies has significantly increased the cost of imports, thereby fueling inflation in Nigeria. Despite the Central Bank of Nigeria’s (CBN) efforts to stabilise the exchange rate, persistent economic weaknesses and speculative pressures have hampered their success.

Exchange rate volatility is a critical factor contributing to rising inflation, impacting various sectors of the Nigerian economy. Over the past few years, the naira has experienced substantial depreciation against major currencies like the US dollar and the euro.

For instance, the exchange rate of the naira to the US dollar has worsened significantly, moving from about 360 naira per dollar in 2019 to over 750 naira per dollar by mid-2023 and currently ranging between N1500-N1520, according to a source close to BusinessDay.

This depreciation has been driven by several factors, including declining oil revenues, limited foreign exchange reserves, the practice of flexible exchange rates, and macroeconomic instability.

Nigeria relies heavily on imports for consumer goods and industrial inputs. The depreciation of the naira means that importing goods becomes more expensive. For example, according to the National Bureau of Statistics (NBS), the cost of imported food items has seen a sharp increase.

In 2022, Nigeria spent approximately $3.03 billion on wheat imports alone, a key ingredient in many staple foods. This high cost is partly due to the weaker Naira, which makes each dollar spent on imports more expensive, translating into higher prices for consumers.

Agricultural sector challenges:

Nigeria’s agricultural sector, which is vital for food security and economic stability, faces numerous challenges. Poor infrastructure, inconsistent government policies, and security issues have hindered productivity, resulting in higher food prices.

Also, the Chief Economist and Managing Editor of Proshare Nigeria, Teslim Shitta-Bey, noted that high insecurity in the country’s farm belt had been a major driver of inflation. According to Shitta-Bey, incessant kidnapping and attacks on farmers and motorists in the food belt had reduced farm-gate production.

“It is not just about the farmers. Even if the farmers produce and the people who transport the food are waylaid, that has happened several times between the North and the Southern border towns, which has put a premium on the cost of transportation.

So, if transporters move goods, they have to charge more because of the high risk. “Insecurity is a major driver of food inflation, which currently is about 37 percent,” he explained.

Unfortunately, the food inflation rate, as reported by NBS, has surged to 40.53 percent, a catastrophic consequence for the Nigerian economy. This alarming figure reveals the severe impact of exchange rate depreciation on everyday life, as basic food items become increasingly unaffordable for many Nigerians.

Adaku, a small business owner in Lagos, Nigeria, shares the struggles of coping with the relentless surge in prices despite the Central Bank’s efforts to curb inflation through increased monetary policy rates. She expresses a sense of disillusionment as she witnesses the continuous rise in costs, affecting both her business and her customers.

Nigeria’s persistent inflationary challenges despite increased monetary policy rates show the multifaceted nature of the issue. While monetary policy plays a crucial role, factors such as supply chain disruptions, exchange rate volatility, and agricultural sector challenges contribute significantly to rising prices.


Oluwatobi Ojabello, senior economic analyst at BusinessDay, holds a BSc and an MSc in Economics as well as a PhD (in view) in Economics (Covenant, Ota).