"One option here would be to increase the number of independent members of the committee (currently only four out of 12) and/or reduce the members from the CBN and other government agencies," the think tank said.
An Abuja-based policy think tank, Agora Policy, has highlighted strategic ways in which the Central Bank of Nigeria (CBN) can tame Nigeria's soaring inflation.
A maiden report by the policy think-tank titled "Understanding Nigeria's Soaring Inflation and How to Tame It" said controlling money supply is key to managing inflation.
Nigeria's annual inflation rate rose to 22.41 per cent in May from 22.22 per cent in the previous month, according to the National Bureau of Statistics (NBS).
Inflation has remained high in Africa's largest economy, prompting the apex bank to hike interest rates to their highest levels in nearly two decades.
In an aggressive push to contain the nation's inflationary pressure, the Central Bank of Nigeria, in May, raised its benchmark lending rate to 18.5 per cent.
In its report, the think tank said inflation at 22 per cent means that the challenge of moving the Nigerian economy forward and improving the lives of ordinary people is significantly harder.
"This high inflation is especially worrying for food which, at nearly 25 per cent, means that the poorest who as of 2019 already spent roughly 60 per cent of their incomes on food, are in a very difficult position.
"When combined with other recent policy efforts, such as the removal of fuel subsidies, the seriousness of the challenge should be apparent as inflation has been projected to surge even higher," the think tank said.
It said that given that keeping prices "stable" or keeping inflation low is the core monetary policy objective of the CBN, then it is easy to make the case that the central bank has been, and is, failing its core mandate. "If you add popular annoyance against exchange rate issues, then the scorecard is likely to be very poor, " it said.
The think tank argued that the failure is due to the CBN's misunderstanding of its powers in terms of what it can and cannot do.
"This misunderstanding has led it down the unconventional policy route which, as expected, has resulted in higher inflation and not much else.
"That misunderstanding however is a good lesson for the CBN going forward, especially in the context of the new government's zeal to set a more credible path for monetary policy," it said.
Way forward
According to the report, the starting point is for the CBN (and given the current circumstances, the executive also) to recognise the scale of the inflation challenge and the importance of getting inflation under control.
It said as long as inflation remains high, every other objective, be it the quest for exchange rate stability or the president's agenda for increased cheap lending to MSMEs, will be much more difficult to achieve.
"The CBN needs to remember that its primary monetary policy objective is to keep inflation in check," the report said.
The think tank explained that given that inflation is currently much higher than ideal, the direction of monetary policy has to be to tighten or reduce the growth of money supply.
This, it said, also means that interest rates will likely have to go up.
"How far up? At least to the point where 'real' interest rates are no longer negative, but maybe even higher," it said.
"These actions to reduce the growth of money supply and increase interest rates are likely to be complicated by all the underhand administrative measures which were put in place to force rates down or to limit money supply growth through the back door.
"For example, the many administrative measures have meant that the monetary policy rate has recently no longer influenced interest rates either for government securities or at the banks, making the monetary policy committee effectively meaningless."
It noted that the unwinding of the ad-hoc CRR policy, which means money refunded to banks, will also have unintended effects if not managed. The CBN will need to unwind most of these ad-hoc measures.
The think tank said given the misdirection by the CBN over the last few years, there may be a tendency for the government to want to take closer control of monetary policy.
This, it said, will likely be counterproductive as it has been demonstrated here in Nigeria and in other countries where governments tend to want to use monetary policy for other non-inflation objectives, the underlying problem that the CBN faces today.
Strengthening MPC
The report said a better way forward would be to strengthen the monetary policy committee and place limits on CBN's actions that fall beyond the scope of its regular monetary policy actions.
"One option here would be to increase the number of independent members of the committee (currently only four out of 12) and/or reduce the members from the CBN and other government agencies," the think tank said.
For instance, the report said there is no real reason why the deputy governor for corporate services, a largely administrative role, should be voting on monetary policy.
"Increased oversight, to ensure that the CBN actually implements the decisions of the monetary policy committee, would also help strengthen the credibility of the CBN.
"Finally, the direct sources of expansion in money supply witnessed over the past decade, specifically the ways and means of financing the government and the myriad of intervention funds will have to stop.
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"Else, it would be equivalent to removing the plug to drain liquidity from the bathtub while at the same time turning on the taps.
"As demonstrated above, not everything is within the purview of central banks," the report said.
For instance, it said supply shocks, which are beyond the remit of central banks, are also known to drive up inflation.
"This in essence means that other actors, such as the governments at both the federal and state levels, can take actions to influence supply positively, which should put downward pressure on prices and therefore reduce inflation.
"Lessons can be learnt from efforts aimed at tackling rising inflation around the world. Yes, central banks took actions to tighten monetary policy as they were required to but other actors took a variety of actions to put downward pressure on prices as well.
"For instance, the US govt took measures to ease supply chain logistical challenges that were blamed for rising logistics costs," it said.
The report said the UN facilitated the exports of wheat and fertilizer as part of the Black Sea grain initiative to put downward pressure on global food prices as a result of the conflict in Ukraine.
In Germany, it said the government increased investment in public transportation to manage rising transport costs.
"And so on. The lesson for Nigeria is that even though the CBN has a key role to play in managing inflation, and needs to play its part, the government can also make a significant difference," the report said.
