In a recent report, the World Bank has raised concerns about the effectiveness of the Central Bank of Nigeria's (CBN) monetary policy tightening in addressing the country's persistent inflation. The report, titled "Global Economic Prospects," highlights the risks associated with Nigeria's economic growth, particularly the failure of tightening policies to rein in inflation.
The tightening of the monetary policy rate (MPR) involves increasing interest rates to control soaring inflation. However, the World Bank suggests that this approach may not be sufficient to address the inflationary pressures in Nigeria. The report also predicts that Nigeria's economic growth rate for the remainder of 2024 and 2025 will remain unchanged, with projected growth rates of 3.3% and 3.5%, respectively.
The World Bank's concerns are echoed by experts who argue that consecutive aggressive interest rate hikes can further depress the economy. High interest rates make it difficult for manufacturers, contractors, and others to borrow, leading to low productivity and potential job losses. The poor contribution to growth and vulnerability to rate hikes in the oil and manufacturing sectors are cited as reasons to exercise caution in tightening interest rates.
The Deputy Governor of the CBN's Financial System Stability Directorate, Philip Ikeazor, has expressed similar concerns. He points out that rising input costs and low capacity utilization have already resulted in a projected contraction of the Purchasing Managers' Index (PMI) in the industrial sector. Ikeazor emphasizes the need to strike a balance between controlling inflation and supporting economic growth.
The World Bank report also emphasizes the substantial risks to Nigeria's growth outlook, including the possibility that monetary policy tightening may fall short of reining in inflation. It predicts that economic conditions will gradually improve after the initial shock of macroeconomic reforms, resulting in sustained but modest growth in the non-oil economy. The report also expects the oil sector to stabilize as production recovers.
To address the elevated food inflation, Professor Uche Uwaleke, a Professor of Finance and Capital Market, suggests that the fiscal authority should play a more significant role in addressing issues such as insecurity, transport challenges, and climate change. These factors, which are exogenous to the CBN, contribute significantly to inflation. Uwaleke emphasizes the need for the CBN to recognize that Nigeria is facing stagflation, not just inflation, and
to consider growth concerns in future meetings of the Monetary Policy Committee (MPC).
Dr. Muda Yusuf, the Chief Executive Officer of the Centre for the Promotion of Private Enterprise, echoes the need for caution in interest rate hikes. He highlights the challenges faced by real sector investors, such as high costs of diesel, logistics, transportation, and taxation problems. With the latest tightening, the prime lending rate is expected to reach 27-28%, making it extremely difficult for businesses, particularly SMEs, to operate profitably.
The World Bank's report and the concerns raised by experts highlight the need for a balanced approach to monetary policy. While controlling inflation is crucial, it is equally important to support economic growth and address structural challenges that contribute to inflationary pressures. The collective efforts of both the monetary and fiscal authorities are necessary to achieve sustainable economic stability and development.
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