On July 25, 2023, the Central Bank of Nigeria (CBN) employed a new method of addressing inflation as it adjusted the asymmetry corridor by increasing the incentives of banks. This adjustment implies that banks would lend to the CBN Monetary Policy Rate (MPR) lower than 300 basis points through the means of the discount window. Prior to this period, Nigeria’s apex bank used to borrow from commercial banks at MPR lower than seven percent (700 basis points). Consequently, commercial banks would now gain 15.75 percent.
This move by the CBN is considered a strategic one as is restricts credit and cap liquidity. Although there is a likelihood that the adjustment would restrict credit flow, experts fear that it would have a negative effect on local production. President Bola Ahmed Tinubu had promised the country a low-interest rate to build a robust credit economy. The current hike contradicts the promise made by the President. However, it implies that the current CBN management could put its independence into use against many odds.
Skyrocketing cost of food is a major cause of inflation.
CBN Acting Governor, Folashodun Sonubi, speaking at a meeting organised by the Monetary Policy Committee (MPC) in Abuja, asserted that the skyrocketing cost of food is a major cause of inflation, emphasising the need to control its development. The committee has been cautious in deciding on a policy. However, the result of these arguments favour a moderate rate hike for sustenance of efforts towards anchoring expectations of the hike, bridge the gap in negative real interest rate and boost investor confidence.
Thus, the MPC resorted to increasing the monetary policy rates. Six members of the committee voted for the raise; four by 25 basis points and two by 50 basis points. Five members also voted for the consistency of the monetary policy rate. However, every member voted to reduce the asymmetric corridor from over 100 to minus 700 basis points. Therefore, the MPR vote increased the policy rate by 25 basis points — from 18.5 to 18.75 percent —symmetric corridor was also adjusted to plus 100 minus 300 basis points, while the CRR and liquidity ratio was retained at 32.5 percent and 30 percent respectively.
Blueprint to foster improved growth of the economy.
ActionAid Country Director, Ene Obi, stated that the prescription of international best practices is that the debt service-to-revenue ratio should not exceed 20 percent of export earnings or 30 percent of low-income countries’ revenue. She added that to ease the current economic and fiscal environment in Nigeria, ActionAid Nigeria in collaboration with CSJ and Nigeria Labour Congress created an economic blueprint for the current government. She explained that the blueprint is a brief on the alternative policy architectures that could foster quick recovery and improved growth of the economy.
Lead Director CSJ, Eze Onyepere, stated that the meeting was called to contribute to the agenda of the Tinubu-led administration. This is as a result of the challenging economic and social times in the country. He highlighted policies like the fuel subsidy removal, exchange rate unification and the organised introduction of palliatives to ease the impact of policies. He added that judging from the point of views of ActionAid, NLC, and CSJ, it is believed that other measures can be taken to produce significant results for Nigerians.
Reforms to aid flexibility of labour markets.
According to projections from the World Economic Outlook Growth of the International Monetary Fund, there is a need for reforms that will make labour markets flexible through encouragement of participation and reduction of job search. Therefore, there would be a facilitation of fiscal consolidation and an easier decline in inflation toward desired levels. The report further highlighted that the loosening of labour markets would include short-term training programmes for professions experiencing declines, facilitation of immigration flows, and passage of labour laws and regulations that enable work flexibility.
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CBN increases commercial banks’ incentives. – There is a likelihood that the adjustment would restrict credit flow. – Express your point of view.
I understand your concern that the adjustment to commercial bank incentives by the CBN could potentially restrict credit flow. However, I believe that the CBN’s decision to increase incentives for commercial banks is a positive step that will help to stimulate economic growth.
By providing incentives to commercial banks, the CBN is encouraging these institutions to lend more money to businesses and individuals. This increased lending can help to create jobs, boost consumer spending, and drive economic growth.
While it is important to monitor the impact of these adjustments on credit flow, I believe that the benefits of the CBN’s decision outweigh the potential risks. By working together, we can ensure that these adjustments are implemented in a way that supports economic growth and benefits everyone.
This is a good development for the commercial banks. There are a lot of problems going on in the economic sector. Atleast the increase in the incentives will help the banks get back to their feet.
Addressing the situation requires a careful balance between controlling inflation and stimulating economic growth. Here are the things that should be focused on to be able to achieve the balance:
Targeted Monetary Policy: Adjust interest rates to regulate credit flow.
Fiscal Measures: Address root causes of inflation through targeted policies.
Structural Reforms: Improve sector efficiency to reduce inflationary pressures.
Collaboration: Engage stakeholders for consensus-based solutions.
Support for Vulnerable Groups: Provide targeted assistance.
Labor Market Reforms: Introduce flexible labor policies.
Responsible Debt Management: Maintain fiscal stability.
Transparent Communication: Build confidence through clear communication.
Implementing these measures can help Nigeria address inflation and foster sustainable growth and not increasing the incentives of banks.
I agree with your concern that the CBN’s modification of commercial bank incentives would potentially limit loan flow. But I think the CBN’s decision to give commercial banks more incentives is a wise one that would support development in the economy.
It is a positive development for the commercial banks that the CBN is giving incentives to them. The economic sector is experiencing numerous issues. The boost in incentives will at least aid in the banks’ recovery and improvement
The CBN is pushing commercial banks to lend more money to companies and people by offering incentives to these organizations. This higher financing may contribute to job creation, greater consumer expenditure, and economic expansion.