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Assessing the Impact of CBN's Monetary Policy on Nigeria's Economy: A Call for Holistic Approaches


In recent times, the Central Bank of Nigeria (CBN) has consistently increased the Monetary Policy Rate (MPR) in an attempt to curb inflation and stabilize the economy. However, this strategy appears to be counterproductive, as evident in the continuous rise in prices, food scarcity, escalating terrorism, and growing poverty rates. The disconnect between the intended outcomes of these monetary policies and the harsh realities faced by Nigerians necessitates a critical reassessment of the CBN's approach.

**The Ineffectiveness of Raising MPR**

Raising the MPR is typically aimed at controlling inflation by making borrowing more expensive, thereby reducing spending and slowing down price increases. However, in Nigeria's context, this policy has not yielded the desired results. Here are several reasons why:

1. **Cost-Push Inflation**: The inflation in Nigeria is largely driven by supply-side factors, including high costs of production and distribution, exacerbated by insecurity and infrastructural deficits. Raising the MPR does little to address these underlying issues.

2. **Limited Access to Credit**: Higher interest rates restrict access to credit for businesses, particularly small and medium-sized enterprises (SMEs). This stifles entrepreneurial activity and job creation, further exacerbating poverty and economic stagnation.

3. **Imported Inflation**: A significant portion of Nigeria’s inflation is imported due to the heavy reliance on imported goods. Fluctuations in global oil prices and foreign exchange rates have more impact on prices than domestic monetary policies.

4. **Government Borrowing**: Higher interest rates increase the cost of government borrowing, diverting funds from critical development projects to debt servicing. This reduction in public investment further cripples economic growth.

**The Socioeconomic Consequences**

The persistent hike in MPR has had severe socioeconomic repercussions:

- **Rising Food Prices**: Higher costs of financing for agricultural activities lead to increased food prices, aggravating food insecurity.

- **Increased Poverty**: As the cost of living rises, more Nigerians are pushed below the poverty line, unable to afford basic necessities.

- **Escalating Terrorism**: Economic hardship fuels social unrest and provides fertile ground for terrorist recruitment, worsening the security situation.

**Proposed Alternatives to Raising MPR**

A multifaceted approach is needed to address the complex economic challenges facing Nigeria. Here are several alternatives that could be more effective than merely raising the MPR:

1. **Supply-Side Interventions**:

- **Agricultural Investment**: Enhance support for the agricultural sector through subsidies, improved infrastructure, and access to modern farming techniques. This will boost food production and reduce prices.

- **Infrastructure Development**: Invest in critical infrastructure such as roads, power, and water supply. Improved infrastructure reduces production and distribution costs, mitigating cost-push inflation.

2. **Enhanced Security Measures**:

- **Comprehensive Security Strategy**: Strengthen the capacity of security agencies and implement comprehensive strategies to combat terrorism and insecurity. A secure environment is essential for economic activities to thrive.

3. **Diversification of the Economy**:

- **Industrialization**: Promote industrial growth by providing incentives for manufacturing and processing industries. Diversifying the economy reduces dependence on imports and creates jobs.

- **Encouraging SMEs**: Develop policies that support SMEs through easier access to credit, tax incentives, and capacity-building programs.

4. **Monetary and Fiscal Policy Coordination**:

- **Balanced Approach**: Ensure better coordination between monetary and fiscal policies. While the CBN focuses on inflation control, the government should drive fiscal policies that stimulate growth and employment.

- **Debt Management**: Implement prudent debt management practices to reduce the fiscal burden of high-interest rates and ensure funds are available for development projects.

5. **Social Safety Nets**:

- **Targeted Social Programs**: Expand social safety nets and implement targeted welfare programs to support the most vulnerable populations. These programs can help mitigate the immediate impacts of economic hardship while long-term solutions are being developed.

**Conclusion**

The challenges facing Nigeria’s economy require more than a simplistic approach of raising the MPR. While controlling inflation is crucial, it must be done in tandem with measures that address the root causes of economic instability. A balanced, holistic strategy that combines supply-side interventions, enhanced security, economic diversification, and social safety nets will be more effective in stabilizing prices, improving food availability, reducing terrorism, and alleviating poverty.

By adopting these comprehensive measures, Nigeria can build a resilient economy that provides prosperity and security for all its citizens. The time for such a transformative approach is now.

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*Daniel Akeju is an advisor and treasury manager based in Nigeria, with a keen interest in promoting professional treasury management as a preventive mechanism against fraud and mismanagement.

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