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CEM REPORT, FINANCE | The Central Bank of Nigeria (CBN) has taken a strong stance on curbing inflation and ensuring price stability, vowing to recover over ₦10 trillion in intervention loans issued to different sectors of the economy. This move comes amidst rising concerns about inflation, which recently reached a record high of 29.90% in January 2024.

CBN Governor Reiterates Stance on Exiting Direct Financing

Governor Olayemi Cardoso, while announcing the outcomes of the Monetary Policy Committee (MPC) meeting on Tuesday, February 27, 2024, reiterated the apex bank’s decision to pull out of direct development financing. The MPC meeting resulted in a significant tightening of monetary policy, with the following key decisions:

• Monetary Policy Rate (MPR) increase: The MPR, the benchmark interest rate, was raised by 400 basis points to 22.75%. This is the highest rate in the bank’s history.
• Asymmetric corridor adjustment: The assymetric corridor around the MPR was adjusted to +100/-700 basis points from +100/-300 basis points.
• Cash Reserve Ratio (CRR) increase: The CRR, the portion of customer deposits that banks must hold as reserves with the CBN, was increased from 32.5% to 45%.
• Liquidity ratio maintained: The liquidity ratio, the ratio of a bank’s total assets that must be readily available in cash or other liquid assets, was retained at 30%.

Governor Cardoso emphasized the committee’s prioritization of tackling inflation over pursuing economic growth, highlighting the detrimental impact inflation can have on growth if left unchecked.

Inflation Concerns Drive Policy Tightening

The recent surge in inflation has become a major concern for the CBN and the Nigerian government. The National Bureau of Statistics reported that headline inflation rose to 29.90% in January 2024, surpassing the previous record of 28.92% in December 2023.

Cardoso attributed the inflationary pressures to several factors, including:

• Exchange rate pass-through: The depreciation of the Nigerian naira has increased the cost of imported goods.
• Rising energy costs: The global rise in energy prices has impacted the cost of production and transportation in Nigeria.
• High fiscal deficits: Government spending exceeding revenue generation can lead to inflationary pressures.
• Security challenges in food-producing areas: Disruptions in agricultural production due to security concerns can lead to food shortages and price hikes.
• Global factors: Tight global financial conditions and trade disruptions due to geopolitical tensions can contribute to inflationary pressures in Nigeria.

The CBN forecasts that inflation will remain elevated in the near term before gradually declining. However, the bank acknowledges that the trillions of naira spent on past intervention programs have also contributed to the current inflationary situation.

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CBN to Recover Intervention Loans and Move Away from Direct Financing

Cardoso emphasized the bank’s commitment to recovering the over ₦10 trillion in intervention loans extended to various sectors. He argued that these interventions, while well-intentioned, lacked proper monitoring and caused distortions in the economy through increased money supply.

“The interventions that took place in the recent past were estimated in excess of N10 trillion. I’m not talking about ways or means. I’m talking about the interventions that you just asked – about over 10 trillion naira. What was the budget of the federal government of Nigeria? What was the budget of the largest state in Nigeria? Do the math and it will tell you the extent of damage, too much of what may appear to be good things can do to an economy.”

Recall an earlier CEM report where the Central Bank of Nigeria (CBN), disclosed that it will shift its attention from development financing initiatives and focus more on advisory roles on economic growth.

The governor outlined the CBN’s new approach to economic development:

• Focus on core mandate: The CBN will prioritize its core mandate of price and exchange rate stability.
• Monitoring existing interventions: The bank will closely monitor existing interventions to ensure their successful completion and potential recovery of funds.
• Transparency and accountability: The CBN plans to publicly disclose details of the intervention loans in the future.
• Partnerships for targeted interventions: The bank is open to partnering with entities with the expertise to handle targeted interventions effectively.
• Ending failed interventions: The CBN is committed to avoiding future interventions that are prone to failure and do not reach their intended beneficiaries.

Cardoso also reiterated his stance on the undervaluation of the naira, attributing it to “distortions” that are currently under investigation. He assured that the culprits responsible for these distortions will be held accountable.

The CBN’s tightening of monetary policy and commitment to recovering intervention loans represent a significant shift in its approach to economic management. These measures aim to curb inflation and ensure price stability, but their potential impact on economic growth and job creation remains to be seen.