Something is wrong with Cardoso’s ways

The old saying that it is improper to keep repeating one thing over and over again but expecting a different result cannot be overemphasised in the case of Olayemi Cardoso, the Central Bank of Nigeria (CBN) governor, and the Monetary Policy Committee. The headline inflation rate reads 32.15 per cent, which is one of the worst in the world, but it is better than last month’s.

The CBN has raised interest rates further again. However, it is problematic that the CBN governor has not adopted global inflation-controlling policies after one year in office. They have now gone from 18.75 per cent in July 2023 to 27.25 per cent in August 2024. They also keep increasing the money supply—printing money, a policy that has an inverse relationship with rate increases.

The policy is evidently ineffective. One reason for this failure is that most businesses in Nigeria have no access to finance. But the CBN does not seem to be paying attention to the significant action that could control inflation—reducing the money supply. To be clear, printing money is against the advice of many, including the World Bank.

In its last report, the Bretton Woods institution, which I always blame for prescribing harmful policies to Nigeria, asked the CBN to stop printing money to finance government spending. However, according to the latest data from the CBN, the money supply of M2 has increased by 63.3 per cent compared to August 2023. The value of this money supply stood at N107.18 trillion as of August 2024, compared to the previous year when it was N65.63 trillion last year.

For those who should know, M2 is a crucial indicator of the overall money supply in every economy. It is the cumulation of cash, coins, demand deposits, currency outside banks, and liquid assets that can easily be converted into cash. Policymakers, economists, and investors closely monitor countries’ M2 data to understand their economic trajectory and prospects.

Yes. It is correct to think that increasing M2 will stimulate economic growth and investment, but excessive growth creates inflation and financial instability, as we experience in Nigeria. On the contrary, raising interest rates is expected to slow the economy by making borrowing more expensive and reducing consumer spending and investment. This is something we do not need in Nigeria right now.

If the CBN governor had been conscious of his environment, he would have seen businesses and people struggling to engage in economic activities compared to last year. He would have also realised that aside from the persistent inflation, the apex bank’s actions—raising rates and increasing the money supply—have created more uncertainty and volatility by incapacitating producers and terrifying investors. I can affirm that Cardoso is achieving the opposite of his core mandate—stabilising prices.

We have seen that whenever the CBN governor makes a policy announcement, he bemuses us with arguments that raising interest rates is what the textbook proposes in this situation. He might not be wrong if other factors were in place, such as most businesses having access to finance and a fast-growing economy.

Sometimes, we hear arguments that the Western economies followed a similar policy to control post-pandemic inflation. Yes, it is also partially correct, as they increased interest rates. However, the CBN helmsman will not tell you that these developed economies had stopped increasing the money supply since they saw the threats of inflation.

Western central banks have been engaged in quantitative tightening (QT), a monetary policy tool for reducing the amount of money in circulation and, in turn, controlling inflation since early 2022. The QT in Western countries was implemented to withdraw the excess money supply from the system—quantitative easing, which started in 2008 and continued for 14 years until the inflationary effects of the pandemic became a problem.

The goal of raising interest rates and QT was achieved in about 11 months, early 2023, when inflation was deemed under control. Instead of copying this tactic, the CBN employs the opposite, increasing the money supply but expecting similar results.

This is a situation where a person keeps doing the same thing and expects to get a different result. Cardoso’s continued rate hikes over 12 months without seeing the desired effects is like over-adjusting the water temperature in a shower. He reacts too strongly to interest rate hikes while ignoring issues like the money supply and other underlying structural problems like the distorted exchange rate regime, production constraints, and other governance bottlenecks. He seems to need help.

In a non-economic explanation, controlling inflation by raising the interest rate and simultaneously increasing the money supply is like putting diesel in a petrol car: fundamentally incompatible and counterproductive. Raising interest rates and the money supply simultaneously is contradictory, with different effects on domestic investments, foreign investments, savings, and bonds.

The high interest rate makes domestic borrowing more expensive. Finding businesses that want to borrow at 27.25 per cent and still make a decent profit is difficult. Even if they do, they must pass these high rates on to the final consumer, which means higher prices.

On Friday, the Manufacturers Association of Nigeria (MAN), after requesting a 1% interest rate in August, raised concerns that the recent increase in borrowing costs will now require them to pay over 35 per cent on their credit facilities. With inflation at 32.2 per cent, businesses like those owned by members of MAN will be cautious and reluctant to commit to new investments. This explains why large corporations are unwilling to invest in the country or relocate to more stable economies.

Another point to note is that these high interest rates encourage households to save and make new bonds attractive, but older bonds lose value. If the money supply rises, people face inflation risk, which will reduce their real bond returns. One certainty is that if inflation persists at the current rate, it will erode savings by one-third by next year, leading to wealth evaporation. The pragmatic investors know this. This discourages long-term savings, and they will demand higher bond returns to protect against rising prices.

The news of foreign investors getting attracted to this high interest rate as interest rates in Western economies are falling is positive. However, a steady flow of foreign investment needs a strong and predictable currency that maintains its value in international markets. The naira is not. Still, the demand for the international-dollar bond, which currently yields 9.7 per cent, is optimistic. Undoubtedly, this is a short-term response.

The dollar bond can become less attractive, as happened with Greece and some European countries after the 2008 financial crisis. An increased money supply and unstable foreign exchange will signal higher inflation and currency devaluation risks. Investors will fear payment default. Bloomberg recently reported that Nigeria has failed to pay bond coupons. Although it blamed it on system issues, investors are wary. These policies are superficial. They know it.

Let’s be clear: wisdom has been chasing Cardoso since his appointment, but he has always been faster. Specifically, institutions, academics, economic agents, and even multilateral agencies have all advised him on attaining price stability. Evidence has shown that raising rates will not fix the problem. We have resigned that Cardoso will keep pushing the economy into hotter water.