MPC: Why MPR was raised by 400 basis points- Cardoso

. Says Naira grossly undervalued

.Financial expert, Prof Uwaleke says MPC decision ‘an overkill’

.MPC outcome to hurt real sector- Muda Yusuf

By Mathew Brangyet

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), on Tuesday, listed the current inflationary and exchange rate pressures, projected inflation, and rising inflation expectations as reasons it increased the Monetary Policy Rate (MPR) by 400 basis points to 22.75 per cent from 18.75 per cent.

The CBN Governor, Olayemi Cardoso, announced the decision on Tuesday at the 293rd meeting of the Monetary Policy Committee (MPC) held at the CBN Headquarters in Abuja.

Cardoso said that the asymmetric corridor around the MPR was adjusted to +100 – 700 basis points from + 100 -300 basis points.

“The Cash Reserve Ratio (CRR) was increased from 32.5 per cent to 45 per cent, while the Liquidity Ratio was retained at 30 per cent.

“The committee decisions is centred around the current inflationary and exchange rate pressures, projected inflation, and rising inflation expectations.

“Members are concerned about the persistent rise in the level of inflation and emphasised the committee’s commitment to reverse the trend as the balance of risk leans towards rising inflation.

” The committee, however, acknowledged the tradeoff between the pursuit of output growth and taming inflation but was convinced that an enduring output expansion is possible only in environment of low and stable inflation,” he said.

This is the first MPC to be held by the apex bank since Cardoso took over as CBN governor last year.

Announcing the decision, Cardoso said the committee agreed to raise the asymmetric corridor to +100 and -700; raise Cash Reserve Ratio from 32.5 per cent to 45 per cent and retain the Liquidity Ratio at 30 per cent.

Faced with rising inflation at 29.8 per cent and a currency that has depreciated, Cardoso is seeking monetary solutions to price and exchange rate stability.

The exchange rate went as high as N1,700 at the official exchange market last week and close to N2,000 per dollar at the Bureau de Change Segment of the Foreign Exchange Market.

By January last year, the exchange rate was at about N470 at the official market and around N740 at the BDC segment before floating the currency on June 14, 2023.

In the last MPC held on July 25, 2023, the monetary authorities raised the Monetary Policy Rate from 18.5 per cent to 18.75 per cent as part of moves to calm inflation.

Cardoso said the consideration for the hike in MPR was based on the rising inflation.

“Members were concerned about the persistent rise in inflation and emphasised commitment to reverse the trend,” Cardoso said.

Meanwhile, the CBN governor has said that Nigeria’s currency, the Naira, is grossly undervalued.

Cardoso said this on Tuesday in Abuja, while presenting a communiqué from the 293rd meeting of the apex bank’s Monetary Policy Committee (MPC).

He said that the foreign exchange market had not been functioning effectively and had been distortionary in outcome, thereby creating a serious challenge for the Naira.

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“We are presently investigating some of the manipulations that have been taking place.

“For distortions that came up due to bad behaviour, those involved will be made to face the full wrath of the law ” he said.

The CBN governor said that the apex bank was clearing the backlog of genuine forex claims, adding that the country’s foreign reserves now stood at 34 billion dollars

“Just today, we paid another 400 million dollars to those that have been so identified,” he said.

He said that it was important that the foreign exchange market had a good amount of liquidity and minimal distortion.

“In recent times we have been able to attract liquidity into the system.

“We have attracted up to two billion dollars as a result of the tools that we have used to calibrate interest rate.

“We are collaborating with law enforcement agencies to ensure that we can understand better what is going on in the market.

“We are moving to a very aggressive regulatory environment where we will have zero tolerance for sharp practices,” he said.

“He said that players in the market would have to abide by all CBN regulations as those who refuse would face the consequences.

According to him, a very thorough exercise is going on to identify what went on in the past and what needs to be done.

Cardoso said that the CBN was moving away from interventions programmes and development finance initiatives like the Anchor Borrowers Programme, as they were time-consuming and counter productive.

“Everybody’s concern js about price stability, and we should put everything we have into ensuring price stability.

“The interventions took away a lot of time for things we do not have the expertise to do, and it created a lot of distortions in the economy through inflow of money supply.

“The interventions that took place in the recent past were estimated in excess of N10 trillion. It did a lot of damage to the economy, ” he said.

He, however, said that the apex bank was taking concrete steps to recover loans that were given out through such interventions.

Reacting to the decision of the MPC to increase the Monetary Policy Rate (MPR) by 400 basis points to 22.75 per cent from 18.75 per cent, Nigeria’s first Professor of Capital Market Studies, Uche Uwaleke described the decision of the Apex Bank as “an overkill.”

Uwaleke stated that it was dangerous to raise the MPR by more than 200 basis points since the Monetary Policy Committee has another opportunity to meet next month and review the impact.

He said one of the negative impacts of the decision of the CBN would be lower Gross Domestic Product numbers especially from agric and industry sectors as well as a surge in unemployment levels.

Uwaleke said: “Jerking up the MPR by 400 basis points in one fell swoop is simply an overkill. Why not by not more than 200 basis points since they have another opportunity to meet next month and review impact?

“They didn’t stop at MPR, they also jerked up the CRR to 45 per cent which at the previous level of 32.5 per cent was among the highest in Sub Saharan Africa.

“The CBN Governor had assured that policies of the bank would be evidence-based. Which empirical results support this aggressive move?

“I pity the real sectors of the economy. The implication is that for every deposit in the bank, CRR takes 45 per cent of it while Liquidity ratio takes 30 per cent. So, it is only 25 per cent of the deposit that banks can lend.

“This has negative implications for access to credit, cost of capital for firms, cost of debt service by the government and asset quality of banks.

“Expect banks to quickly reprise their loans with negative consequences for non-performing loans and financial soundness indicators.

“By this overkill on the economy in a bid to crash elevated inflation which by the way has numerous non-monetary factors driving it, output is bound to shrink.

“So, expect lower GDP numbers especially from Agric and Industry sectors as well as a surge in unemployment levels. This is not a welcome development.”

Also reacting, Founder, Centre for the Promotion of Private Enterprises (CPPE), Dr Muda Yusuf, says the outcome of the 2024 Monetary Policy Committee (MPC) meeting will impair the real sector of the economy.

Yusuf said this on Tuesday in Lagos while reacting to the outcome of the MPC two-day meeting held on Feb. 26 and Feb. 27.

The CPPE founder noted that the real sector was already contending with numerous macroeconomic challenges.

According to him, the increase of MPR from 18.75 per cent to 22.5 per cent; and CRR from 32.5 per cent to 45 per cent posed a major risk to the financial intermediation role of banks in the Nigerian economy.

He stated that the increase would constrain the capacity of banks to support economic growth and investment, especially in the real sector of the economy because the increases were quite significant.

Yusuf observed that while the decision was consistent with the typical policy response of Central Banks globally, it failed to reckon with domestic peculiarities.

He noted that the Nigerian economy was not a credit driven economy, unlike many advanced economies which had much higher levels of financial inclusion, robust consumer credit framework and strong correlation between interest rate and aggregate demand.

“The level of financial inclusion in the Nigerian economy is still quite low, access to credit by households and small businesses is still very challenging, and the informal sector accounts for close to 50 per cent of the economy.

“Private sector bank credit as a percentage of GDP was 14 per cent in 2022 in Nigeria.

“It was 59 per cent in South Africa, 30.9 per cent in Egypt, 30 per cent in Botswana, 51.6 per cent in the United States and 130 per cent in the United Kingdom.

“These underscore the variabilities across economies; thus, policy responses have to be different.

“The key drivers of Nigeria’s inflation are largely supply-side variables, and the CBN ways and means financing and the hike in MPR or CRR would not change these variables.

“Over the last two years, there had been persistent monetary policy tightening, yet there has not been any significant impact on the inflationary pressures. If anything, the general price level had been continuously on the increase,” he said.

Yusuf added that the new dramatic increase in MPR meant that the cost of credit to the few private sector that have exposure to bank credits would increase.

This, he stated, would impact their operating costs, prices of their products and profit margins, amidst very challenging operating conditions.

“It is thus imperative for the CBN to accelerate the process of increased capitalisation of the development finance institutions to create a concessionary financing window for the real sector and the small businesses,” he said.