How CBN plans to slash inflation with new framework?

Nigeria is facing a serious challenge of rising and unstable inflation, which has eroded the living standards of its citizens and hampered the growth of its economy.

The headline inflation rate rose for the 10th consecutive month to 27.33 per cent in October, while food inflation reached an 18-year high of 31.52 per cent.

The main drivers of inflation include the surge in global energy prices, the disruption of supply chains due to the COVID-19 pandemic, and the insecurity in some parts of the country.

To address this challenge, the Central Bank of Nigeria (CBN) is working with the Ministry of Finance and other relevant fiscal authorities to develop a new price management and stability framework that will improve the effectiveness of monetary policy and foster stable and sustainable economic growth.

This was revealed by the CBN Governor, Olayemi Cardoso, at the annual dinner of the Chartered Institute of Bankers of Nigeria (CIBN) in Lagos.

According to Cardoso, the CBN has approved the adoption of an explicit inflation-targeting framework, which will set a clear and measurable goal for inflation and guide the conduct of monetary policy. The details and requirements for this framework are currently being finalised alongside the fiscal authorities, he said.

Cardoso said the CBN was well aware of the damage inflation has caused to the living conditions and businesses of Nigerians, and assured that the new framework would be effective in anchoring the CBN’s agenda of price stability. He said he had met with various stakeholders, including small business owners, individuals, and families, who expressed their concerns about the impact of inflation on their operations and well-being. He said they emphasised the need for stable prices to create a conducive business environment, protect the purchasing power of citizens, and ensure a fair distribution of resources.

Cardoso also noted that Nigeria’s inflationary trend was influenced by both global and domestic factors, and that well-crafted monetary and fiscal policies could ease domestic price pressure.

He said the CBN had responded to the inflationary pressures caused by the surge in energy prices by increasing the benchmark interest rate from 11.5 per cent to 13.5 per cent in September, and by providing liquidity support to the power sector. He also said the CBN had intervened in various sectors of the economy, such as agriculture, manufacturing, and health, to boost production and reduce import dependence.

Cardoso said the CBN was committed to working with the fiscal authorities and other stakeholders to implement the new inflation-targeting framework and achieve the desired outcomes of price stability and economic growth. He said the CBN would continue to monitor the developments in the domestic and global economy and take appropriate actions to safeguard the interests of Nigerians.

“They shared stories of struggling to maintain affordable prices for their customers while facing rising costs for raw materials and supplies.

“The instability caused by inflation not only affects their profit margins but also hampers their ability to plan for the future.

“These entrepreneurs stressed the need for price stability to create a conducive business environment that allows them to thrive and contribute to the economy.

“In recent discussions with individuals from different walks of life, I encountered a young family trying to make ends meet in the face of rising prices.

 “They shared their worries about the erosion of their purchasing power and the challenges of meeting basic needs within a tight budget.

“They emphasised the importance of stable prices to protect the well-being of ordinary citizens and ensure a fair distribution of resources.

“It is crucial that we prioritise price stability to safeguard the livelihoods of our fellow Nigerians,”

Cardoso further explained that while the country’s inflationary trend was due to both global and domestic challenges, well-crafted monetary and fiscal policies could ease domestic price pressure.

Cardoso noted that in response to the inflationary pressures caused by the surge in energy prices resulting from the Russia-Ukraine conflict, monetary authorities worldwide had raised policy interest rates, which led to tighter global financial market conditions and significant outflows of funds from emerging market countries such as Nigeria.

According to him, these developments have strengthened the dollar, exacerbating inflationary pressures while weakening currencies and depleting external reserves in many emerging market countries such as Nigeria.

As a result, several central banks in emerging markets and developing economies have implemented restrictive policies to contain rising inflation and reduce capital outflows.

He, however, pointed out that the domestic factors affecting Nigeria’s economic performance are wide-ranging, encompassing both social and economic aspects.

“Insecurity remains a pressing issue, affecting the agricultural, industrial, and services sectors simultaneously.

“The persistently high levels of insecurity have resulted in decreased national output and productivity, as many farmers have been unable to access their farmlands, disrupting supply chains and major economic activities. This has led to food shortages and inflation in various parts of the country.

“Infrastructure constraints also pose significant challenges, undermining the production chain and distribution network of goods and services.

“Additionally, issues such as business bottlenecks and a culture of poor service delivery, particularly within the public sector, further hinder the fortunes of the Nigerian economy.

“Addressing these challenges requires a well-crafted structural policy, complemented by coordinated monetary and fiscal policies,” Cardoso said.

According to him, he and the Minister of Finance and Coordinating Minister of the Economy Wale Edun are meeting on how to address the critical issues.

Cardoso laid out the efforts aimed at controlling inflation and other key policy priorities of his administration at the 58th Annual Bankers’ Dinner and Grand Finale of the 60th CIBN anniversary.

According to him, a thorough assessment of the economy reveals significant challenges, including high and rising inflation, inadequate foreign exchange supply, depreciation of the exchange rate, limited external reserves, weakened output, and high unemployment.

He noted that the challenges have pushed up interest rates, discouraging investments in productive activities while high inflation has affected asset quality and solvency ratios in the banking sector, just as persistent depreciation of the naira poses a significant risk for domestic banks with foreign exchange exposures.

He said the focus of his administration at the apex bank would not be a figurative expression of data but to achieve meaningful improvements in the living conditions of Nigerians.

Cardoso said: “To address these challenges, the CBN is committed to achieving monetary and price stability. This is not just a technical objective, but it has real-life implications for the well-being of our citizens.

“Through targeted policies, transparent market operations and coordination between monetary and fiscal authorities, we can ensure a more stable exchange rate, control inflation, and create an enabling environment for businesses and individuals to thrive.”

He added new foreign exchange guidelines and legislation would be developed to ensure clarity, transparency and harmonisation of operating rules, which are essential for the proper functioning of domestic and foreign currency markets.

The CBN governor said policy formulation and assessment will be continuously monitored as key macroeconomic indicators on fiscal and monetary activities would be tracked, diligently evaluated, and necessary adjustments made if things are not pointing in the right direction or moving at the right pace.

According to him, the key indicators to be tracked include consumer price indices; headline and core inflation rates; Gross Domestic Growth (GDP), tax-to-GDP; per capita income; balance of payments, foreign exchange reserves, unemployment rate, as well as more granular measures that the apex bank uses in assessing stability of the financial system.

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