Government palliative purchases driving food inflation in Nigeria – Cardoso

Olayemi Cardoso, Governor of the Central Bank of Nigeria (CBN), has said that government purchases of palliatives are a contributing factor to rising food prices in Nigeria.

During the latest Monetary Policy Committee (MPC) meeting held between March 25 and 26, 2024, Cardoso noted that new inflation drivers are emerging beyond the usual monetary factors. This was according to his personal statement in a document released by the CBN, which summarized the discussions of the MPC members.

He said:

• “Our first Monetary Policy Committee (MPC) meeting held on February 26th and 27th 2024, was one month ago with a deliberate short date in the following month to enable us to review the impact of the initial 400 basis point hike in the policy rate.
• “Despite notable stability in the foreign exchange market resulting from decisions taken at that 293rd MPC meeting, inflationary pressure remains unabated. While there is the argument that the significant tightening since the last MPC meeting is yet to fully permeate the system and yield its expected impact, the risk of galloping inflation persists.
• “If such a hyperinflationary scenario is to become reality, available options to control inflation could be severely constrained. From the facts presented to the MPC, there is a clear indication that the monetary factors contributing to inflation are diminishing in their significance. This could be considered as evidence of the impact of decisions reached at the 293rd MPC meeting.
• “Staff reports show that the principal drivers of acceleration in inflation are hikes in food and energy prices which are associated with structural factors. Further, new dimensions to inflationary pressure are emerging. First, ‘seller inflation’ arising from the oligopolistic structure of commodity markets such as noticed in the prices of local commodities is gaining significance.
• “In addition, huge purchases by the government for distribution as palliatives to vulnerable citizenry is adding another dimension to the food price inflation, with seasonal factors of food price increases during religious fasting and festive periods, adding price cyclicality. Some of these new sources of inflation are better addressed by the fiscal authorities to complement the efforts of monetary policy in achieving all round price stability.”

Higher MPR targeted at attracting foreign capital

The CBN governor further disclosed that apart from targeting inflation with a higher monetary policy rate (MPR), the major concern was to reduce the negative real interest rate and attract foreign capital.

He said:

• “Having identified these non-monetary components of the current inflationary pressure, the major concern of the MPC at the March 2024 meeting was to ensure that the negative real interest rate is reduced to attract capital flows to improve liquidity in the foreign exchange market and stabilize the exchange rate.
• “In the short term, attracting capital flows via foreign portfolio investments and moderating the exchange rate pressure is a proper course of action, bearing in mind the impact of exchange rate pass-through on inflation in an import-dependent economy like Nigeria.”

The need for structural reforms

Cardoso stressed the importance of combining monetary policy with fiscal measures and structural reforms, especially in agriculture, electricity, and energy sectors. These steps are crucial for long-term investment and sustainable economic growth in Nigeria.

He said:

• “In the prevailing circumstances, it is my view that the argument for a further hike in Monetary Policy Rate (MPR) to complement the rate hike at the last MPC meeting is valid. This increase in the MPR will help curb inflationary pressure and reduce the negative real policy rate.
• “Most importantly it will further strengthen the anti-inflationary signal of the Central Bank of Nigeria (CBN) as we transition to an inflation targeting regime.
• “This, however, is predicated on the assumption that sustained fiscal and monetary policy coordination will result in policies that address the multitude of structural factors required for long-term investment and economic growth in Nigeria. Without addressing the structural issues in agriculture, electricity, and energy sectors we may continue to see persistent increases in food inflation.”

More Insights

• The Central Bank of Nigeria (CBN), under Yemi Cardoso, has increased the monetary policy rate (MPR) by 600 basis points so far, from 18.75% to 24.75% to combat inflation and foster economic stability.
• In March 2024, the food inflation rate reached 40.01% year-on-year, marking an increase of 15.56 percentage points from 24.45% in March 2023. This surge in food inflation can be attributed to rising prices for items such as garri, millet, and akpu uncooked fermented (all part of the Bread and Cereals category), as well as yam tuber, water yam, and others.
• Also, Nigeria’s inflation rate increased to 33.2% in the same month, indicating 1.5% points increase from the 31.7% recorded in February 2024. Inflation in March was driven by increase in food and beverages coupled with energy and housing costs.