IMF Seeks Tighter Monetary Policy To Tame Rising Inflation
With the rising prices that have continued to squeeze living standards worldwide, the International Monetary Fund (IMF) has urged governments to tighten the monetary policy to tame inflation that is currently being driven by increasing food and energy prices.
The Fund notes this will inevitably have real economic costs, but the situation could be exacerbated if corrective actions are delayed. IMF advice is premised on the likelihood that interest rate hikes will bite next year, with the global economy growing by just 2.9 per cent and in turn slowing price increases worldwide.
The Central Bank of Nigeria (CBN) at its July Monetary Policy Committee (MPC) meeting increased the Monetary Interest Rate by 100 basis points to14 per cent, moving it up from 13 per cent where it was raised in May. The last quarter has seen the apex bank increasing the MPR twice to 250 basis points.
Rising inflation has forced the MPC, which previously held the MPR at 11.5 per cent, to move it up by three per cent in three months.
The Committee’s decision to tighten interest amidst rising global inflation was informed by the concern that loosening it will compound the already bad liquidity situation in the country, resulting in further depreciation of the naira.
“If inflation continues to rise at this rate, we will continue to tighten the rate, but we are looking at other measures that will slow down inflation and food prices. But if that does not happen, we (MPC) cannot promise that rate hikes will stop,” CBN governor, Godwin Emefiele said.
To overcome this headwind, the Fund noted that targeted fiscal support can help cushion the impact on the most vulnerable.
The Bretton Woods Institute said policymakers should focus on policies that have specific impacts on energy and food prices as well as focusing on those that are most affected without distorting prices.
“And with government budgets stretched by the pandemic such policies will need to be offset by increased taxes or lower government spending,” it said.
The Fund noted that the surging food and energy prices have continued to quicken global inflation and increase the cost of living.
Prices have surged since late 2020, pushing inflation steadily higher from a moderate level when the Covid pandemic began to a steep downward dip as it progresses through its early months Consequently, it has led to a significant rise in the average global cost of living in the 18 months since the start of 2021 than it did during the preceding five years combined.
For instance, July inflation in Nigeria was 19.64 per cent, representing a 17-year high that could go higher, owing to other macroeconomic challenges, including its weak currency when the National Bureau of Statistics (NBS) announces the rate for August on Thursday. It was 18.6 per cent in June.
One of the key drivers is Food which inflation also increased to 22.02 per cent, the highest since May 2021, driven by the rising cost of bread and cereals, potatoes, yam, and other tubers, meat, fish, oil, and fat.
While other upward pressure came from gas, liquid fuel, solid fuel, passenger transport, garments, cleaning, repair, and hire of clothing, compared to the previous month, the July inflation went up by 1.82 per cent
According to the IMF since the start of 2021, the average contributions just from food exceed the overall average rate of inflation during 2016-2020.“In other words, food inflation alone has eroded global living standards at the same rate as inflation of all consumption did in the five years immediately before the pandemic.
“A similar story holds for energy costs, which show up both directly and indirectly, through higher transportation costs. And the relative impact of food, energy, and other items in driving inflation varies considerably across countries.
In Nigeria also, the surging energy cost has forced many firms to adjust their operations with the latest from the banking industry where heavyweights like GTCO, UBA, and Access among others have all adjusted their closing hours, and now closing by 3 pm as against 4 pm that hitherto was.
In a country where the electricity supply is unstable, reliance has been on alternative energy like power generators which diesel to power now stands at N800 and above in some cases.
“Inflation continued to climb through July, albeit a little more slowly. Though circumstances vary by country, the latest observations show a slight change in the composition of inflation, with food’s share increasing further while energy-related categories eased slightly. This is consistent with the possibility that global energy prices have been passed on to consumers more quickly than higher wholesale food prices,” the Fund said.
In its World Economic Outlook for July, the Fund projected inflation to reach 6.6 per cent this year in advanced economies and 9.5 per cent in emerging market and developing economies—upward revisions of 0.9 and 0.8 percentage points respectively from three months earlier. In Nigeria however, it is double-digit.
Food inflation rose in Nigeria by 0.99 per cent to 22.02 per cent on a YoY basis, compared to 21.03 per cent recorded in July 2021.
On a MoM basis, the food inflation rate declined by 0.01 per cent to 2.04 per cent in July, from 2.05 per cent in June. This is attributed to the reduction in the prices of some food items like tubers, maize, garri, and vegetables.
On a MoM, food inflation was highest in Kwara, at 3.90 per cent, followed by Delta, 3.6 per cent and Benue, at 2.94 per cent; while Taraba was slowest at 0.14, followed by Gombe, 0.94 per cent and Niger at 1.13 per cent.
Food Inflation on a YoY basis was highest in Kwara, 29.28 per cent, followed by Akwa Ibom, 27.22 per cent and Kogi, 26.08 per cent; while it was lowest in Kaduna, 17.16 per cent, Jigawa, 17.46 per cent and Anambra, 19.25 per cent.
Also, core inflation, which excludes the prices of volatile agricultural produce, stood at 16.26 per cent on a YoY basis; up by 2.54 per cent when compared to 13.72 per cent recorded in July 2021.
On a MoM basis, the core inflation rate rose by 0.20 per cent to 1.75 per cent in July from 1.56 per cent in June 2022. The highest increases in core inflation were recorded in prices of gas, liquid fuel, solid fuel, passenger transport by road, passenger transport by Air, garments, cleaning, repair and hire of clothing, NBS stated.
A further look a the NBS report shows that Akwa Ibom recorded the highest inflation rate of 22.88 per cent, followed by Ebonyi, 22.51 per cent and Kogi, 22.08 per cent. Jigawa recorded the slowest inflation rate of 16.62 per cent, followed by Kaduna, 17.04 per cent and Borno, 18.04 per cent on a YoY basis.
On a MoM basis, inflation was the highest increase in Adamawa at 2.87 per cent, Abuja, 2.84 per cent and Oyo, 2.77 per cent, while Bauchi reported the lowest at 0.82 per cent, followed by Kano, 0.83 per cent and Niger, 1.03 per cent.
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