How monetary, fiscal policies should respond to rising interest rate, inflation

Interest rates are rising due to tightening measures adopted by Central Banks across the globe to rein in inflation.

Also, persistent foreign exchange pressure, rising debt among others are major issues affecting the economies of most countries.

In his article, titled, ‘The CBN is powerless to correct economic problems’, Dele Sobowale, a columnist, said, undeniably, all the economic indices – inflation, exchange rate, interest rate, job creation, balance of trade etc — by which the success or failure of monetary policies are assessed are not favourable. But, the CBN is as much a victim as the rest of Nigerians. We don’t have a Federal Government which can formulate and implement sound fiscal policies. The CBN Governor is forced to do his job as well as those of the President, Vice President, Minister of Finance and Agriculture. Under such circumstances, something has to give way.”

Analysts in the financial services and economists have called for collaboration between the fiscal and monetary authorities in addressing these challenges.

“There must be collaboration between the fiscal and monetary authorities to tackle the challenges in the country,” said Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited.

Ayodeji Ebo, managing director/CBO, Optimus by Afrinvest, said, “We need to see more collaboration between the fiscal and monetary authorities. The burden is more on the monetary authorities and there is a limit to what can be achieved. The fiscal authorities need to focus more on creating an enabling environment for businesses to thrive which will boost revenue in the long run.”

To mitigate the problems of uncertainty in the conduct of monetary policy, central banks seek ways to obtain a better knowledge of the structure and functioning of the macro-economy as well as the transmission mechanism of monetary policy. The credibility of the Central Bank is also an important factor in ensuring the efficient conduct of monetary policy, especially under conditions of uncertainty. Central Banks can also design robust policies that can perform well on average across all the available fully specified models rather than to reign supreme in any particular model, in order to mitigate the problem of model uncertainty, the apex bank said.

Over the intervening period of between, 2015 – 2016, the CBN embarked on a cycle of tightening which culminated in hike in the Monetary Policy Rate (MPR) from 12 percent to the prevailing 14 percent in July 2016. The decision was expected to rein in expected inflationary pressures that may result from exchange rate pass-through to domestic prices, and ensure that inflation expectations are well anchored. It was also expected to set off increased capital inflows to the country, which should improve accretion to reserves.

Read also: Osinbajo decries lack of synergy between fiscal, monetary policies

Furthermore, the outbreak of Covid-19 and its attendant lockdown, as well as Russia’s invasion of Ukraine early this year heightens risks across the world.

In its last meeting in September 2022, the Monetary Policy Committee (MPC) noted the continued uptrend in inflation for the seven consecutive months, with headline inflation (year-on-year) rising to 20.52 percent in August 2022, from 19.64 per cent in July.

As part of its measures to address the current challenges, the apex bank recently raised the Monetary Policy Rate (MPR) by 150 basis points to 15.5 per cent from 14 per cent. The CBN also raised banks’ Cash Reserve Requirement (CRR) by 750 basis points to a minimum of 32.5 per cent, from 27.5 per cent, in order to mop up liquidity from banks’ vaults and discourage currency speculation. The apex bank, however, left the Liquidity Ratio (LR) unchanged at 30 per cent.

Through its various intervention programmes, the CBN has been able to support the economy. However, the CBN said it has slowed down on its intervention funds. Meanwhile, the apex bank said it has recovered N3.7 trillion out of N9.3 trillion given out as intervention funds.

During the meeting, the Committee noted the marginal increase of 0.39 per cent in the level of external reserves to US$38.46 billion at the end of August 2022 from US$38.31 billion at the end of July 2022 despite continued demand pressure. With crude oil price forecast to continue to moderate in the short to medium term, Members urged the Central Bank not to relent on the various policies put in place to support non-oil exports to shore up external reserves.

Consequently, under the Real Sector Facility (RSF), the CBN released the sum of N66.99 billion to 12 additional projects in manufacturing and agriculture. Cumulative disbursements under the Real Sector Support Facility (RSSF) currently stood at N2.10 trillion disbursed to 426 projects across the country.

Furthermore, under the 100 for 100 Policy on Production and Productivity (PPP), the Bank disbursed the sum of N20.17 billion to 14 projects in healthcare, manufacturing, and services, bringing the cumulative disbursement under the facility to N93.39 billion to 62 projects.

In the healthcare sector, N4.00 billion was disbursed to two healthcare projects under the Healthcare Sector Intervention Facility (HSIF), bringing the cumulative disbursement to N130.54 billion for 131 projects, comprising 32 pharmaceuticals, 60 hospitals and 39 other services. Under the Export Facilitation Initiative (EFI), the Bank funded several commodity projects in the non-oil export segment for value-addition and production to the tune of N3.24 billion, aside the N50.00 billion disbursed through the Nigerian Export Import Bank (NEXIM).

In the Micro, Small and Medium Enterprise (MSME) sector, the Bank supported entrepreneurship development with the sum of N39.26 million under the Tertiary Institutions Entrepreneurship Scheme (TIES), bringing the total disbursement under this intervention to N332.43 million. Under the Intervention Facility for the National Gas Expansion Programme (IFNGEP), the Bank disbursed N1.00 billion to support the adoption of Compressed Natural Gas (CNG) as the preferred fuel for transportation and Liquefied Petroleum Gas (LPG) as the preferred cooking fuel.

In its macro update and social inclusion strategy, FSDH research said the proposed 2023 budget does not present any significant hope to the myriad of challenges facing the country. Debt servicing gulps about one-third of the total expenditure and this share is likely to be higher at the end of 2023 when actual figures are released for several reasons. First, interest rates are trending upwards. Second, revenue will likely underperform leading to more borrowing to cover the gap. Thus, only about a quarter of total expenditure will be spent on capital projects in 2023. Already, figures from the budget office show that debt servicing exceeded revenue by 19 percent in the first four months of 2022. This trend is expected to continue in coming quarters.

Nigeria is already spending more money on just debt servicing, according to Finance Minister Zainab Ahmed, and the country is finding it very challenging to fund its massive petrol imports on the back of collapsing oil exports, BusinessDay has learnt.

In March this year, Nigeria issued a $2.2 billion Eurobond to enable the Nigerian National Petroleum Company Limited (NNPC) to pay for the importation of petrol, which the country must subsidise with N18.5 billion daily, but analysts say the country is increasingly finding it difficult to find foreign exchange to finance fuel imports.

On expectations from the next MPC meeting, analysts at FSDH research said, the tightening position of the MPC is not surprising, with amplified inflationary pressure over the past four months and heightened capital flight due to higher rates in advanced countries.

The CBN has in recent times cited the growth in money supply as one of the drivers of inflationary pressure, thus motivating aggressive rate hikes.

“Nevertheless, aggressive tightening is concerning in view of Nigeria’s fragile economic growth. Mopping up credit could limit growth of loans to businesses.

“Beyond raising rates, the government’s fiscal and trade team will need to step-up actions to address the rising inflation. In addition, more attention should be given to the Federal Government’s aggressive accumulation of CBN ways and means.

“Efforts to securitize the ways and means and ensure more transparency need to be hastened.

“Going forward, with persistent inflationary pressure, widening fiscal deficit, and government borrowing, we anticipate that the MPC will maintain its current stance to examine the impact of recent rate hikes on the economy,” the analysts said.