In June 2022, Nigeria’s inflation rate reached a five-year high of 18.60 percent. The high inflation rate is challenging the over 100 million poor Nigerians. The policy-setting committee of the Central Bank of Nigeria (CBN) has raised the monetary policy rate (MPR) from 13 percent to 14 percent to help tame rising inflation. The action of the CBN may fail to achieve its objective for diverse reasons.
The MPR is one of the crucial monetary policy instruments used by the CBN to stabilise prices in an economy. The MPR is the baseline interest rate in an economy; it is the rate the CBN lends to the commercial banks, and upon the MPR the commercial banks lend to their customers. Monetary policy is any conscious action of the CBN to control the quantity, availability, and cost of money.
The latest hike is the second consecutive time the CBN has raised the MPR this year. At its meetings on May 24, 2022 and July 19, 2022, it hiked the MPR from 11.5 percent to 13 percent and from 13 percent to 14 percent with the aim of taming inflation in Nigeria. Each time the CBN hikes the MPR, the commercial banks raise their lending rates, which results in an increased cost of borrowing in the economy.
According to the CBN, the hike in the MPR was to reduce the inflationary pressure and restore investors’ confidence in Nigeria. The MPR hike is expected to reduce consumption and investment, thus helping to stabilise the economy.
Monetary policy has not worked in Nigeria as it does in other countries; Nigerians have not felt the regulatory impact of the CBN monetary policy as inflation rates have continued to rise. According to the National Bureau of Statistics, Nigeria’s inflation rose from 17.71 percent in May 2022 to 18.60 percent in June 2022. The high inflation rate in Nigeria shows that the CBN’s MPR hike has not been able to achieve its objective.
High inflation has thus eroded the value of money in Nigeria; Nigerians go to the market with sizable wallets and come with near-empty bags. Many Nigerians are passing through pain as they buy lesser quantities of consumables and can no longer eat twice a day due to high commodity prices.
Nigerian producers are also feeling the pain of high inflation; the cost of production has tripled, and it has become so frustrating to contribute meaningfully to the national output. Many producers have cut production and reduced their workforce to survive Nigeria’s economic situation.
The question academics, researchers, economists, and others are asking is: Can the MPR hike tame inflation in Nigeria? The rate increase has not effectively tamed inflation in Nigeria due to the high cost of production, low investment, poor infrastructure, insecurity, and others. The causes of high inflation in Nigeria are mainly from the supply side of the economy.
A hike in MPR results in high commercial banks’ lending rates. The high cost of production caused by high commercial banks’ lending rates goes to the consumers in the form of high commodity prices. The Lagos Chamber of Commerce and Industry advised the CBN to formulate and implement more viable investment-friendly policies instead of a hike in MPR to boost production and lower inflation in Nigeria.
Investment has been low in Nigeria following the high level of insecurity. Many local and foreign investors are discouraged from doing business in the Northern and Middle Belt regions of Nigeria due to the fear of being kidnapped by criminals. Many farmers have not resumed farming in the Northern and Middle Belt regions due to the fear of being killed and raped by bandits.
Poor infrastructure contributes to high inflation in Nigeria. Many Nigerian roads are in bad condition. As a result, the cost of moving manufactured goods and agricultural produce from the factories and farms to the market is very high.
The supply of electricity is still very poor in Nigeria. Many manufacturers depend on their power generating plants in their operations. The cost of diesel is very high among Nigerian manufacturers. The Nigerian consumers pay the high cost of running the manufacturers’ power-generating plants.
The CBN and the Nigerian government must understand that high-interest rates will increase the cost of production and aggravate high inflation rates in Nigeria. The government must fix insecurity and infrastructure problems challenging the economy.
The Nigerian government needs to investigate and make viable socio-economic policies to help check the high cost of production, restore security and fix the infrastructural gap in the ecosystem, thereby reducing inflation in the country.
Felix Ashakah is an economics lecturer at Western Delta University, Oghara
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