Going hard on MPR may not augur well now

Tightening up after a prolonged period of monetary loosening is a newly maintained decision by Nigeria’s policymakers at the apex banking authority’s regular Monetary Policy Committee (MPC) meeting, which was held Tuesday.

After a unanimous voting session, the MPC resolved to raise the Monetary Policy Rate (MPR), the benchmark interest rate, to 13 per cent after two years of consistently maintaining the same at 11.5 per cent. This new rate was disclosed by the governor of the Central Bank of Nigeria (CBN), Mr Godwin Emefiele, while reading the communique, which contains the high points from the MPC’s meeting.

The bank maintained that the rate was raised to mop up liquidity ahead of the 2023 general elections, while the need to tighten up was also consistent with external global experiences in the face of rising inflationary pressures. In the light of this, the CBN governor remarked that “the sharp rise in inflation across both the advanced and emerging market economies has generated growing concerns among central banks as the progressive rise in inflation driven by rising aggregate demands and wage growth has put sustainable pressure on price levels.”

“Consequently, the major central banks such as the US Fed, the Bank of England, European Central Bank, and Bank of Canada have provided strong guidance of a progressive shift away from monetary policy accommodation to drive market interest rate, which may ultimately impact capital flows away from emerging market economies,” Emefiele said.

With global inflationary pressures influencing monetary tightening across countries worldwide, Nigeria’s decision to raise the benchmark rate at this time may be analogous to keeping the economy further subdued, despite its encouraging GDP numbers.

Indeed, the National Bureau of Statistics announced that the country’s 2022 Q1 performance by GDP growth is 3.11 percent. While this growth rate sounds quite sumptuous, the figure only looks good on huge screens and printed reports. In reality, however, Nigeria’s growth story eludes its citizens; Africa’s economic giant only boasts of a jobless and non-inclusive growth in a highly compromised socio-political atmosphere.

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In a heavily stressed and distressed economy like Nigeria, raising interest rates to curb inflationary pressures may not suffice as planned. Ceteris paribus, higher interest rates should increase the currency value and lure more foreign interests into a country compared with other countries that present lower rates. But when a country with a high interest rate has its political and economic structure distorted and compromised, then the dividends of raising interest rates will not be accrued.

With the hope that high interest rates will attract foreign investments and boost the demand and value of a nation’s currency, speedy spikes in inflationary movements can destroy the value of a nation’s local currency faster than a rising interest rate can compensate for investments. Hence, raising the interest rate in isolation cannot determine the value of a country’s currency.

It is important that Nigeria’s policymakers must consciously commit to addressing the political and economic challenges that befall the nation if policy decisions like the recent monetary tightening must work. Arresting the biased flow of foreign currency to a specific class of individuals in the bid to fund personal political interest, engaging optimal reserve management policies to provide ample room to defend the local currency and mitigate any inbound shocks, improving national revenue efficiency through massive technological and industrial diversification strategies, addressing tax administration challenges, easing fiscal overdependence, promoting privatisation policies with special focus on public assets that constitute a drain to the national treasury, among others, all which have dire implications on the economy in general, must be given priority.

Fiscal augments to monetary interventions should also be made available to protect the integrity of the policy hitherto made. For instance, high and rising debt levels can frustrate “inflation-removing” efforts of central bankers. When debt levels become overbearing, it can result in higher inflation rates, and governments will usually prefer to respond by devaluing the local currency. For Nigeria, raising rates in an environment plagued with a huge debt profile in the face of low domestic production and high import consumption may not augur well eventually.

While the CBN increased the MPR, other parameters were left untouched as the asymmetric corridor of +100/-700 remained the same, the cash reserve ratio was retained at 27.5 per cent, and the liquidity ratio was kept at 30 per cent.