Categories: Business

MPC members concerned about rising inflation, share of government in total credit to economy

MEMBERS of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria have expressed concern about the rising share of government in total credit to the domestic economy, saying that government can explore alternative financing mechanisms for infrastructural spending.

The (MPC) met on March 21, 2022, in an environment of heightened geopolitical tensions and persisting macroeconomic uncertainties, associated with the recent Russia-Ukraine crisis and headwinds stemming from the lingering impact of the COVID-19 pandemic.

The Committee reviewed developments in the global and domestic environments in the first quarter of 2022 and the outlook for the rest of the year.

“I am also concerned about the rising share of government in total credit to the domestic economy. Credit to the government in February, when annualised, is far above the provisional benchmark for 2022. The rise in public debt is a constraint on future income and economic growth.

“I believe that we must signal to the government the costs of deficit financing and continue to prod the government to explore alternative financing mechanisms for infrastructural spending,” one of the members stated.

The members, including Adeola Festus Adenikinju, Kingsley Isitua Obiora, in their personal statements said that since 2020, over 40 per cent of Central Banks across the world have increased their policy rates.

According to them, some nearby countries in Africa have also increased their policy rates, adding that this would impact on relative yields between Nigeria and those countries and affect portfolio investment flows. The speed of normalisations indicated by the Federal Reserves and other Central Banks in advanced economies also means that Nigeria cannot realistically keep interest rates at the present level in the face of rising domestic prices.

The transmission of the imported food prices to Nigeria they said, confirmed the importance of maintaining food security in the country.

They want CBN interventions in critical agricultural products like wheat to be sustained, stressing that food security should be a national priority with partnerships of researchers, government and the private sector working together to deepen the agriculture value chain.

“More farmers should be able to access the intervention funds across the country. Intervention should extend to the procurement of inputs, storage and protection of farmers against price volatility.

“As I indicated in my January 2022 statement, the costs of fuel subsidy and its general impacts on investments in the downstream petroleum sector need to be addressed. Also is the massive loss of oil output to theft, vandalism, and other criminality that has threatened fiscal flows from crude oil, as well as investment in onshore production. This is not just going to affect current revenue from oil,” Adenikinju submitted.

Although the Manufacturing Purchasing Managers’ Index (PMI), remained above the 50-index points benchmark in February 2022, it moderated slightly to 50.1 index points from 51.4 index points in January 2022, indicating the need for sustained stimulus to strengthen the positive growth trajectory considering persisting headwinds, the members observed.

Headline inflation (year-on-year) rose by 10 basis points to 15.70 per cent in February 2022 from 15.60 per cent in the previous month, driven largely by a rise in the core component to 14.01 per cent in February 2022 from 13.87 per cent in January 2022, while food prices moderated marginally.

The uptick in core inflation was mostly due to rising energy prices as a result of the recent scarcity of Premium Motor Spirit (PMS), rise in the cost of Automotive Gas Oil (AGO) and hike in electricity tariff.

According to them, while the recent spike in domestic prices may be transitory, it is prudent to take forward-looking policy decisions to mitigate unforeseen adverse price developments and manage inflation expectations. Sustained interventions by the CBN to improve food supply alongside fiscal efforts to contain long standing structural constraints are important considerations in that regard.

According to Obiora, there is a need to calibrate policy responses to achieve an optimum mix of policies that would address the Bank’s mandate of price stability conducive to economic growth.

“I am cautious of the impact of inflation on the economy and therefore, remain committed to a declining inflationary trend. I share the argument that the current inflationary pressure is driven by structural rigidities,” he said.

The Committee, therefore, said it has a window to use the tools at its disposal to fight inflation promptly while keeping an eye on output growth. A marginal interest rate hike, thus, signals the need to curb inflation and could tangentially moderate foreign exchange pressures in the medium term by attracting foreign investors.

IN CASE YOU MISSED THESE FROM NIGERIAN TRIBUNE