CBN fuelling the same inflation it is fighting

The Central Bank of Nigeria’s financing of the federal government’s budget deficit and record high credit to the economy have limited the effectiveness of its effort to curb inflation that is pushing millions into poverty, Bloomberg has reported.

The CBN wants inflation at not more than 9%, but it has exceeded that limit for all but one of CBN governor Godwin Emefiele’s nine years in office.

Inflation rose to 22% in the year to March, from 21.9% in February, according to the National Bureau of Statistics, the highest in almost 18 years.

Although the World Bank says high global commodity prices, a weak naira and floods that destroyed thousands of farmlands last year have contributed in pushing inflation skywards, the central bank’s policies have played a major role too.

– Counter moves

Central banks typically deploy an array of tools to fight down rising prices, the most common being increasing the interest rate at which they lend money to commercial banks. That rate determines how much banks lend to each other, businesses and individuals. A high interest rate is aimed at limiting money supply and cooling inflation.

The CBN has raised its key interest rate from 11.5% last May to 18% last month, the longest phase of monetary tightening since 2011.

But that has failed to curb inflation, in part because the CBN has on the other hand given huge amounts of money to the government when it should not do so. It funded budget shortfalls to the tune of N23.7 trillion ($51 billion) in eight years.

The CBN also demands that commercial banks give at least 65% of deposits as loans to boost economic growth, or face sanctions. Banks can only hold 32.5% as reserves.

These have seen money supply, called M2, rise 18.3% in February from a year ago, while credit given to businesses and consumers increased 16%, according to CBN figures.

Both drove total money supply in the economy to N53.3 trillion and credit to the private sector to N41.8 trillion naira, the highest on record.

– Driving millions into poverty

Bloomberg quoted Ayodeji Dawodu, head of Africa sovereign and corporate credit research at BancTrust & Co, as saying that the CBN is undermining its own goals by the “continued financing of government’s fiscal deficit,” as well as bank rules such as the “minimum loan-to-deposit ratio that banks must maintain to limit excessive cash-reserve-ratio debits.”

Dawodu said the central bank’s tightening measures “have not been effective.”

The World Bank estimates that high food inflation has pushed five million Nigerians into poverty.