Avoiding policy distortion key to Nigeria’s success

Nigeria must do everything to avoid delving into some form of success delusion this year. If not, the economy could end 2025 with a scorecard showing it has achieved most of its targets but still fails to match that feeling with evidence. We could be setting ourselves up for that possibility. Already, we have started […]

Nigeria must do everything to avoid delving into some form of success delusion this year. If not, the economy could end 2025 with a scorecard showing it has achieved most of its targets but still fails to match that feeling with evidence. We could be setting ourselves up for that possibility.

Already, we have started on this scenario with the inflation target of 15 per cent in this year’s budget.  But before we could step into the year, we succeeded in yanking off as much as 9.32 percentage points from the 2024 year-end inflation rate of 34.8 per cent. We achieved this effortlessly by rebasing Nigeria’s Consumer Price Index, an exercise conducted and the result announced by the National Bureau of Statistics.

Ordinarily, reducing inflation in an economy by this margin, even over a year, would be hailed as a significant achievement. It would have been taken as proof of the efficacy of the measures taken by the monetary and fiscal authorities. Of course, such a feat has been achieved, usually through determined efforts backed by a clear understanding of the drivers of inflationary pressures in an economy.

The new inflation result has also raised fundamental questions over the effectiveness of the interest rate hike embarked upon by the Central Bank of Nigeria throughout 2024. The hikes were premised on the assumption that raising the cost of money and at the same time restricting the quantity of money flowing into the economy, were key and appropriate measures needed to checkmate inflation. This gave the impetus to raise the Monetary Policy Rate from 18.75 to 27.5 per cent  within 12 months.

The CBN complemented these hikes with other restrictive measures, such as the increases in the cash reserve ratios for the banks – 50 per cent  for commercial banks and 16 per cent  for merchant banks. It also imposed a liquidity ratio of 30 per cent on the lenders. All these curbed the ability of the banks to advance credit to their customers.

Did these measures need the help of CPI rebasing to achieve their intended objectives? Agreed, there is a lag between policy implementation and the time when its results begin to manifest. CBN governor, Yemi Cardoso, raised this point on Thursday when he addressed the press at the end of the two-day MPC meeting. The meeting ended with a unanimous decision by the members to hold all the parameters, thus ending the year-long hiking spree.

In answer to questions, Governor Cardoso explained why the increases in interest rates had not begun to yield results, especially in bringing down the inflation rate. It was due to the lag effects, he said, with the explanation that the central bank estimated that its policies would normally take between six and nine months to begin to yield results.

Based on this, he said the regulator had projected the impacts of its policies to begin to show forth from the first quarter of the year. Lagged effects are a key consideration in the formulation and implementation of economic policies. They must be taken into consideration in terms of both timing and the size or magnitudes of measures. Ill-timed, or given in disproportionate doses, policies could end up producing the opposite or unintended effects. Policymakers must brace up for such possibilities at all times.

The impact of CBN’s monetary policy measures will still manifest in yet other ways. While the bank kept raising its policy rate, banks also took a cue from it and raised their rates. Some business people have recounted their experiences in the hands of their bankers, some of whom charged them as much as 40 per cent effective interest rates.

Such a high-interest cost entered into the production process and will ultimately reflect in the prices of goods and services. Such lagged impacts will become evident in all sectors of the economy as prices will resist downward pressures, no matter the official inflation rates. Those who borrowed funds at such high rates will be reluctant to sell below cost.

So, could not the government and its agencies have waited to evaluate the impact of the orthodox monetary policies that the central bank had applied at full throttle?  Now, how will the CBN evaluate the effectiveness of its monetary policies over the past year?  There is certainly a difference between reductions in inflation achieved through the application of authentic policy measures and what we have been served by the NBS. What we have now is a nebulous situation that lacks a clear attribution. The reported decline in inflation is neither due to the measures taken to curb inflation nor due to the increased output of goods. Rather, it came through a rebasing exercise.

This highlights the possibility of the economy arriving at an official destination that is at variance with reality. From the inflation rate of 24.48 per cent at the end of January, it could take just a few more steps or months for the official inflation rate to drop to the target rate. Yet the reality on the ground could be different.