CBN Hiked MPR to 24.75%: Can It Curb Inflation?

Nigeria finds itself in a precarious position. Inflation is rampant, exceeding 31% and the Central Bank of Nigeria (CBN) has responded drastically, raising the Monetary Policy Rate (MPR) to a record high of 24.75%. This article will analyse the potential impact of this decision on the Nigerian economy and its citizens, considering both established economic principles and the unique realities of the Nigerian context.

Global Economic Principles and the Nigerian Anomaly

Traditionally, raising the MPR is a tool used by central banks to combat inflation. The higher borrowing costs discourage spending and investment, thereby reducing the amount of money circulating in the economy. This, in theory, should lead to lower prices. However, Nigeria's economic landscape presents some peculiarities:

Oil Dependence: 

Nigeria's economy is heavily reliant on crude oil exports, making it vulnerable to fluctuations in global oil prices. Global oil prices significantly influence government revenue and economic activity. High inflation coupled with a high MPR could exacerbate this vulnerability, as it may lead to increased production costs for oil companies and reduced investment in the sector, ultimately affecting government revenue and foreign exchange earnings. In other words, If oil prices remain high, inflation might persist despite the MPR hike.

Structural Issues: 

Deep-rooted issues like corruption, inadequate infrastructure, insecurity, and a sizeable informal sector can impede the effectiveness of monetary policies.

Informal Sector Dynamics: 

The informal sector, where many unbanked street traders and sole proprietors operate, often operates independently of formal monetary policy measures due to its cash-based nature and limited integration with formal financial institutions. While the MPR hike may influence interest rates and borrowing costs in the formal sector, its direct impact on informal economic activities may be limited. Most small business owners typically rely on personal savings, family networks, or informal sources of credit, rather than bank loans, to finance their businesses. Some of these informal credit sources, usually contribution clubs and cooperatives, have been charging over 36% interest. So, since informal businesses don't borrow from banks, the MPR hike won't directly affect their borrowing costs. Their economic activity might continue more or less as before, except for the greed of the borrowers, who may jump on the opportunity to further exploit the people.

How Will This Policy of the CBN Impact the Nigerian Economy?

Double-Edged Sword: The high MPR can dampen aggregate demand and potentially reduce inflation. However, it could also stifle economic growth, especially for businesses that rely on borrowing for expansion.

Credit Crunch: Small and Medium Enterprises (SMEs), the backbone of the Nigerian economy, might struggle to access loans due to high interest rates, hindering their growth and job creation.

Investment Chill: The expensive borrowing environment might deter foreign investors from seeking better returns, potentially limiting the capital inflow

Exchange Rate Instability: Inflationary pressures, coupled with a high MPR, can contribute to exchange rate volatility in Nigeria. Investors may demand higher returns on their investments to compensate for perceived risks, leading to capital outflows and the depreciation of the local currency. This, in turn, can fuel imported inflation, exacerbating price pressures on essential goods and services.

How CBN's MPR Impact on Citizens

Erosion of Purchasing Power: High inflation coupled with rising borrowing costs will likely reduce the purchasing power of Nigerians, especially those on fixed incomes. This can exacerbate poverty levels.

Debt Burden: Existing borrowers, especially those with variable interest rates, will see their monthly loan repayments increase, putting additional strain on household finances.

Uneven Impact: The impact might vary across income groups. Lower-income households, who spend a larger portion of their income on essentials, might be disproportionately affected.

Unemployment Concerns: Economic uncertainty resulting from high inflation and a high MPR may hinder job creation efforts in Nigeria. Businesses, facing higher borrowing costs and reduced consumer demand, may scale back expansion plans or resort to cost-cutting measures, including layoffs. This can exacerbate existing unemployment challenges and hinder efforts to reduce poverty and inequality.

Impact on Savings and Investments: Higher interest rates can present both opportunities and challenges for savers and investors. While savers may benefit from higher returns on their deposits, borrowers, including small businesses and individuals, face increased borrowing costs. This can discourage investment and entrepreneurship, hindering economic diversification and long-term growth prospects. And if inflation persists, the earnings from savings will still make little or no difference in the lives of the savers.

The Oil Factor: A Lifeline or a Double-Whammy?

High global oil prices could provide some relief by increasing government revenue. However, this is a double-edged sword as it makes or breaks the economy and makes nonsense of the tightening policy of the CBN’s MPR.

Government Spending: Increased oil revenue might lead to higher government spending, potentially countering the intended effects of the MPR hike and fueling inflation further.

Dutch Disease: A sustained rise in oil prices could also lead to "Dutch Disease," a phenomenon where a strong oil sector weakens other sectors of the economy, hindering diversification efforts.

The Road Ahead: A Delicate Balancing Act

The effectiveness of the CBN's policy will depend on several factors:

Oil Price Fluctuations: If oil prices fall, it could worsen the government's fiscal position and exacerbate inflationary pressures.

CBN's Resolve: The CBN will need to maintain a tight monetary stance for an extended period to effectively combat inflation.

Addressing Structural Issues: The government must tackle structural issues like corruption and infrastructure deficiencies to create a more fertile ground for economic policies to take effect.

Conclusion

Nigeria's current economic situation is complex and the interplay between high inflation and an elevated MPR poses significant challenges for the economy and its citizens, given the country's heavy reliance on the volatile oil sector and its departure from conventional economic principles. Addressing these challenges requires a multifaceted approach, including putting an end to insecurity, especially terrorism and the activities of armed herders hindering crop cultivation around the country. Another way is through prudent fiscal management, targeted monetary policies, and efforts to diversify the economy away from oil dependence. Moreover, policymakers must consider the unique dynamics of the Nigerian economy and adopt tailored strategies to mitigate the adverse effects of high inflation and an elevated MPR on both the economy and its citizens.

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