The decisions of the Central Bank of Nigeria (CBN) under Mr Yemi Cardoso are helping to increase the poverty level in Nigeria.
Economy Post analysis shows that some of Mr Cardoso’s policies targeted at reining in inflation and returning the CBN to the orthodox monetary policy system are not only poverty enablers but also poverty drivers.
Top on the list of these decisions is the increase in the monetary policy rate (MPR), which is also known as the benchmark interest rate. Since Mr Cardoso became the CBN governor barely a year ago, the interest rate has been raised five times. Rates have been raised from 18.75 percent in February 2024 to 27.25 percent in September 2024. This implies that the Monetary Policy Committee (MPC), which is chaired by the CBN governor, has raised the base interest rate by 850 basis points over the period.
It is not entirely Mr Cardoso’s fault. According to analysts, Mr Cardoso and the MPC have done what other central banks do all over the world: increase the interest rate to tame inflation.
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Without doubt, inflation has been one of Mr Cardoso and the MPC’s biggest headaches. As at the time the interest rate was raised for the first time in February 2024 to 22.75 percent from 18.75 percent in 2023, inflation had risen from 29.90 percent to 31.70 percent, according to the National Bureau of Statistics (NBS).
With interest rate hikes by the CBN, inflation has dropped, signalling that the rate hikes have had an impact on inflation. Headline inflation declined to 33.40 percent in July 2024 from 34.19 percent in May. Inflation also fell to 32.15 percent in August, down from 33.40 percent in July, NBS said.
“This means that in August 2024, the rate of increase in the average price level is lower than the rate of increase in the average price level in July 2024,” NBS noted.
The twist in September
However, with the inflation rate trending downwards, the CBN maintained its hawkish stance, raising the interest rate by 50 basis points to 27.25 percent in September.
“The committee was unanimous in its decision to further tighten policy and thus decided to raise the MPR to 27.25 percent,” Cardoso said after the MPC meeting last week.
“The committee retained the Liquidity Ratio (LR) at 30 percent and the Asymmetric Corridor at +500/-100 basis points around the MPR.”
This was a surprise to the markets, which had predicted “hold” for the interest rate. “Hold” means that the CBN will neither raise nor lower the interest rate.
Before the MPC meeting, analysts at Coronation Merchant Bank Limited had said, “Given the recent inflation trajectory, we anticipate that the Monetary Policy Committee will likely maintain the benchmark policy rate at 26.75 percent in its next meeting which is scheduled to hold on 23rd and 24th of September 2024.”
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Also, analysts at FBNQuest, on their part, had added, “The MPC is scheduled to meet next month. We expect that the committee will likely pause its rate tightening cycle to evaluate the economic impact of the previous rate hikes.” This was a consensus among several economists.
However, Cardoso and the MPC disagreed, raising the interest rate to protect the economy from recent petrol price increases.
“There is no economic model that portends to take people out of poverty when inflation is accelerating at the level we have seen it. There is none. And for that reason, we do not intend to relent in ensuring that we bring it under control,” Mr Cardoso said after the September meeting.
The poverty connection
But here lies the problem: the more Mr Cardoso and the MPC raise the interest rate, the more they preclude small, micro and nano businesses from accessing credit for expansion, which make up over 90 percent of businesses in Nigeria. Nigeria had 39.654 million micro, small and medium enterprises (MSMEs) as of 2020, but over 95 percent were micro businesses, according to the NBS.
For a nation with a high poverty rate and nearly 40 million MSMEs, raising the interest rate consistently is counter-productive, according to economists.
These small, micro and nano businesses will either borrow at over 35 percent interest rates from deposit money banks or be shut out completely from the credit market. They will either pay back the loans with their profits or cease from expansion due to the cost of credit. Whichever choice is made, jobs will be lost and business shutdowns could occur, worsening an already poverty situation in the nation.
Also, manufacturers will get loans at over 35 percent but will struggle to pay back or choose to shift the cost to cash-strapped consumers, worsening the poverty situation in the nation. Capacity utilisations of manufacturing companies will slump, leading to job cuts and forcing the nation to import all the products from ball pens to shoes.
“It is quite troubling that at a time when manufacturers, entrepreneurs and other investors in the economy are craving for a breath of fresh air, the CBN chose to tighten the noose on them by resorting to a further tightening of monetary policy,” Chief Executive Officer of Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, said in a note sent to Economy Post.
“The latest policy choice of the apex bank is at variance
with the mood of most economic players and the desire to promote economic recovery and growth. What manufacturers and other investors need at this time is some oxygen and stimulus, not policy measures that
would worsen an already suffocating situation. MPR at 27.25 percent; CRR at 50 percent and asymmetric corridor at +500 and -100 are very difficult monetary condition to bear for most businesses, given the prevailing macroeconomic and structural conditions,” he noted.
According to the Manufacturers Association of Nigeria (MAN), “The Manufacturers Association of Nigeria (MAN) acknowledges the efforts of the Central Bank of Nigeria to stabilize the economy. The Association is however surprised that the CBN is increasing the MPR against the backdrop of the meagre improvement in inflation figures, which could be largely traceable to the onset of the harvest season. We also note that this increase is coming at a time that Central Banks, in other climes are either retaining or cutting rates.”
The group said it was expedient that Nigerian government adopt a holistic and balanced approach to policy formulation and decisions, with due consideration of their overall impact on the various sectors of the economy, particularly the productive sector.
“Undoubtedly, price stability is crucial, and so is the survival and growth of the manufacturing sector. This should be top priority at this time and is in line with the government avowed commitment to growing domestic production, creating more jobs and alleviating poverty,” MAN added.
Another CBN decision with negative impact
While the CBN is raising the interest rates to tame inflation, it has stopped all the interventionist programmes embarked upon by the previous regime under the embattled Godwin Emefiele.
Right now, the Cardoso-led CBN has suspended the Anchor Borrowers Programme (ABP) and other schemes meant to support farmers and MSMEs. This has had negative multiplier effects on both sectors.
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“I enjoyed the ABP programme. Five years ago, I increased cassava production four-fold because I was able to expand and produce more cassava and garri due to the ABP. I used to farm up to five hectares of land. But right now, my production has gone down because I can only farm one,” said a Kaduna State-based farmer, Mr Aliu Muhhammadu.
He said 11 of his workers had lost their jobs and were eating from hand to mouth. “Poverty rises when the government cannot support rural farmers. We produce food, but we need assistance go do so in large quantity. If you fail to back us with funding, we will only produce less. Prices will rise but poverty will spread,” he added.
“With the CBN closing all of its interventionist programmes, one would have expected the fiscal side led by Coordinating Minister of the Economy, Mr Wale Edun, to provide aupport for farmers and MSMEs, but nothing has come from him and his team. They seem to be clueless about what they need to do to reduce the poverty level,” one economist, who pleaded anonymity because of his position in the banking sector, said.
