Is the CBN’s inflation strategy sustainable or destructive going forward?

As Nigeria moves into the second half of 2024, the Central Bank of Nigeria (CBN) faces a pivotal decision that will significantly impact the nation’s economic trajectory. The crux of the matter is whether the CBN should persist with its aggressive rate hikes or pause to evaluate the effects of its recent monetary policies.

The CBN’s primary weapon against inflation has been the Monetary Policy Rate (MPR). The most recent adjustment in July saw the MPR climb by 50 basis points to 26.75 percent, part of a broader strategy that has seen an 800 basis point increase throughout 2024. This bold approach is designed to tackle Nigeria’s severe inflation crisis, but the consequences of such aggressive tightening warrant a thorough review.

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Nigeria’s inflation rate has surged alarmingly to 34.19 percent as of June 2024, the highest level since March 1996. Food inflation, in particular, has skyrocketed to 40.87 percent, driven by escalating transportation costs and persistent security issues in key agricultural areas. The repercussions of this inflation are far-reaching, affecting both businesses and households alike.

The CBN’s strategy has led to a significant rise in borrowing costs for various sectors. The Fast-Moving Consumer Goods (FMCG) industry, for instance, has witnessed a dramatic increase in debt levels. Major companies, including Nestlé, Unilever, and Dangote Sugar, saw their borrowing rise from N411.994 billion in Q1 2023 to a staggering N1,108.277 billion in Q1 2024. This surge in debt has translated into a substantial increase in borrowing costs, from N8.788 billion in Q1 2023 to N37.674 billion in Q1 2024.

For consumers, the impact of these rate hikes is felt directly through higher prices for everyday goods and services. The increased cost of borrowing often gets passed down the supply chain, leading to elevated prices. This, combined with shrinkflation—where product sizes shrink while prices remain unchanged—adds to the financial strain on households. With food inflation at 40.87 percent, families are grappling with reduced purchasing power and tighter budgets.

 “The repercussions of this inflation are far-reaching, affecting both businesses and households alike.”

The healthcare sector is also experiencing the effects of rising borrowing costs. Key healthcare providers such as Fidson and May & Baker have seen their collective debt increase significantly, from N19.89 billion in Q1 2023 to N27.78 billion in Q1 2024. The rising debt levels and associated borrowing costs have broader implications, potentially reducing the availability and quality of healthcare services, particularly for low-income and marginalised communities.

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Given these developments, it is prudent for the CBN to reconsider its aggressive tightening approach. Further rate hikes could stifle economic growth, dampen investment, and exacerbate consumer hardship. The increased cost of borrowing might lead to a slowdown in economic activity, impacting overall stability.

A pause in the rate hikes could provide necessary relief, allowing businesses and consumers to adjust to the current economic conditions. This reprieve could help stabilise operations, support economic recovery, and lead to a more balanced growth trajectory.

As Nigeria enters the latter half of 2024, the CBN’s decisions will be under intense scrutiny. Balancing the urgent need to control inflation with the longer-term goal of sustainable economic growth is crucial. By pausing the rate hikes, the CBN could offer a crucial breathing space that allows the economy to stabilise and recover, steering Nigeria towards a more stable and prosperous future.