The CBN’s Monetary Policy Committee (MPC) at the end of its 290th meeting voted in favor of continued contractionary monetary policy to tame rising inflation. Accordingly, the benchmark rate was raised 50bps to 18.0%, while Cash Reserve Ratio (CRR), Liquidity Ratio (LR), and Asymmetric Corridor were left at 32.5%, 30.0%, and +100/-700 basis points around the MPR respectively. The MPC emphasized that the primary considerations for its sixth consecutive MPR increase to record high include risks of financial contagion from the banking crisis in the US and Switzerland, unabating domestic inflationary pressures, weak but positive domestic growth outlook, alongside liquidity concerns in the FX market, and its impact on domestic prices.
On domestic inflation, the MPC projected that price pressure would exist owing to the perennial scarcity of PMS and ongoing discourse around the removal of fuel subsidies. Meanwhile, the Committee anticipates FY GDP growth of about 3.03% (IMF: 3.21%) based on CBN’s favorable outlook on sustained expansion in services and agricultural sectors. Also, the Committee urged the fiscal authority to improve non-oil revenues to clamp down on the fiscal deficit and public debt. While the MPC’s expectation of lingering price pressure is valid, we opine that the knock-on effect of the current cashless policy has contributed to the price trend.
In particular, it is noted that the cost of obtaining cash as well as electronic fees have fed into the price of food and services in the economy. Simultaneously, disruption to manufacturing and some other real sector activities appear to have worsened supply-side woes. As discussed in our earlier note, we also note that the high inflation rate debacle would linger so long as the CBN continues to prioritize fiscal expansion goals, especially through overbearing deficit financing and large-scale intervention facilities – the latter for which cumulatively the CBN has released ₦1.1tn and ₦254.4bn respectively under its Anchor Borrowers’ Programme and Real Sector Facility.
On the lingering liquidity concerns in the FX market, the MPC is optimistic that the RT-200 FX program, Naira-4-dollar, and other policies targeted at attracting remittances would continue to improve accretion to external reserves and improve liquidity. In our view, the rebate on both policies is relatively unattractive to lure exporters and diasporans to the official window given the large spread between the official and parallel market rates. Hence, the focus of the CBN should be more tilted to addressing capital control policies and the multiplicity of the FX window which has continued to hinder the inflow of FX into the economy – FPI and FDI are currently at the lowest level in more than half a decade.
Furthermore, the CBN’s appropriate recommendation for the reduction in the national debt level should also include a reconsideration of Apex bank’s recent approach to banking the FG contrary to its establishment act. Precisely, overdraft to the federal government is a major factor that is expected to take the national debt level to unprecedented and unsustainable highs. As of Q3:2022, total debt stood at ₦44.1tn with the securitization of ways and means projected to edge debt stock to ₦67.8tn. By implication, we project that the debt-to-GDP ratio could surpass DMO’s threshold of 40.0% before year-end without any visible impact on the economy as accompanying debt service requirement crowds out capital investments (debt service-to-revenue has remained above 80.0% in each of the last 3 years).
In all, I strongly recommend that the CBN rethink its strategy around the anchoring of inflation expectations – the reasons for another interest rate hike. If the overall theme is to tame monetary-induced inflation, then financing conditions should reflect the same (however treasury bills rate have remained well below both the MPR and inflation rate). Additionally, the bank’s policies including the cashless program should be executed to complement the price-stability objective while fiscal interventions and FG overdraft financing should be reviewed in light of current realities.
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