The Nigerian central bank’s continued financing of the government’s fiscal deficit is limiting the impact of its longest phase of monetary tightening since 2011 as rising money supply drives inflation to an almost 18-year high.
(Bloomberg) — The Nigerian central bank’s continued financing of the government’s fiscal deficit is limiting the impact of its longest phase of monetary tightening since 2011 as rising money supply drives inflation to an almost 18-year high.
Annual inflation in Africa’s biggest economy quickened to 22% in March from 21.9% in February, the statistics agency said Saturday, even after the Central Bank of Nigeria hiked its benchmark rate by 650 basis points since May.
The central bank’s hawkish stand has failed to curb a sustained rise in money supply and credit to the economy which are both at a record high. While raising rates, the central bank has also funded budget shortfalls to the tune of 23.7 trillion naira in eight years, putting pressure on money supply.
Money supply, or M2, rose 18.3% in February from a year ago, while credit to businesses and consumers increased 16%. Both contributed to push total money supply in the economy to 53.3 trillion naira ($115. 7 billion) and credit to the private sector to 41.8 trillion naira, the highest on record, according to data on the central bank’s website.
“CBN’s ways-and-means financing of Nigeria’s fiscal deficit has played some role in the expansion of monetary aggregates,” said Razia Khan, head of research for Africa and the Middle East at Standard Chartered Bank. “Even with rate-tightening, this might be a better gauge of the overall stance of monetary policy.”
The price index has been above the central bank’s 9% ceiling for almost eight years. Governor Godwin Emefiele said at the bank’s monetary policy committee meeting in March that it will continue tightening, albeit moderately, until the differential between inflation and the key rate at 18% is closed.
The Abuja-based regulator 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,” said Ayodeji Dawodu, head of Africa sovereign and corporate credit research at BancTrust & Co.
The central bank in the West African nation demands that lenders must hold 32.5% of deposits as reserves, and extend at least 65% of the deposits as loans, to avoid penalties.
The central bank’s tightening measures “have not been effective,” Dawodu said.
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