By Babajide Komolafe

The Central Bank of Nigeria (CBN) has been battling with two major problems in the last two years -rising inflation and low credit growth to the private sector. A fillip to these is the increasing pressure on the exchange rate vis-a-vis marginal increase in the foreign reserves. But when its Monetary Policy Committee met two weeks ago, it chose to address only inflation.

Inflation has been a major threat since last year. From last year to the first quarter of this year, inflation was fuelled by huge government spending, election spending, rising cost of food and energy. But as noted by the Monetary Policy Committee of the apex bank, “high fiscal spending, the recent increases in public sector wages, the possible removal of subsidy on petroleum products in the near-term, and further liquidity injection due to AMCON activity are posing further inflationary threat.

And also because of the high import dependence of the nation, the inflation problem would be aggravated should exchange rate be allowed to go up in a bid to conserve the foreign reserves.”

Consequently, the CBN decided to tighten money supply by raising its benchmark rate, the Monetary Policy Rate (MPC) by 50 basis points to 8.0 per cent and the Cash Reserve Requirement (CRR) of banks by 200 basis points to 4.0 per cent.

Though the MPC hike was unexpected by most analysts, it has been commended as necessary. “The combined and unexpected nature of the tightening, a higher MPR and CRR, should help to support foreign exchange stability, by dealing with some of the excess liquidity in the system,” said Khan, who is the Regional Head of Research, Africa Global Research at Standard Chartered Bank.

But what about the problem of weak  credit growth to the private sector,  acknowledged by the MPC as follows:

“Aggregate credit continued to decline largely as a result of reduction in credit to the core private sector, and to state and local governments. The huge growth in credit to government against the backdrop of continuing decline in private sector credit clearly indicates that government borrowing is crowding out private sector credit. Besides, in the post-crisis period, banks in their bid to rebuild their balance sheets have become increasingly risk averse, and have preferred to channel their funds into the relatively risk-free government sector.”

It will be recalled that this problem, popularly called liquidity squeeze, is a fallout of the global financial crisis. In Nigeria, this problem was aggravated by the intervention of the CBN in the eight rescued banks in 2009. And despite measures by the CBN like the N500 billion power sector intervention fund, the problem has refused to go.

And with the further tightening of money supply, the problem will persist. The tightening on one hand has reduced funds available to banks to lend, on the other hand, with banks preferring to lend to government through FGN bonds and treasury bills, the tightening would further reduce lending to private sector. The implication is that while there would be more money for government to spend (or waste since most of fiscal spending goes to recurrent expenditure), there will be less funds available for the businesses to invest and generate jobs. Thus, the tightening has the potential to constrain domestic production and income.

That was the point made by Afrinvest PLC in its research note on the decisions of the MPC. “We opine that the upward review of the cash reserve requirement will lead to a further tightening of liquidity, potentially limiting loan growth to the real sector of the economy and straining the earnings potential of financial institutions.

“We therefore stress the importance of adopting policies that create a conducive environment for domestic production and encourage foreign participation in a bid to achieve sustainable economic growth and macroeconomic stability.”

The outcome of the MPC meeting suggest that the apex bank has decided to abandon or ignore the problem of poor credit growth to the real sector and also closed its eyes to the side effects of fighting inflation. This contradicts its posture last year when it not only fought inflation but also introduced measures to unlock credit to the economy.

Agreed that fighting inflation should be the first priority of the apex bank, it however, needs to do this without jeopardising other macroeconomic objectives.

And that was the point made by the Director-General, Lagos Chamber of Commerce, Mr. Muda Yusuf. He said, “It is understandable that the CBN has a responsibility to manage the delicate balance of the nation’s monetary policy regime but it must ensure that enterprise is not stifled in the process.”

Inflation is not good for the economy. So also is a situation where little or no credit is available to businesses while most of it goes to government.

The CBN while combating inflation needs to realise that the precariously weak flow of credit to businesses demand more than just lamentation during its MPC meeting. It is a problem that cannot be wished away. It must be addressed.