Inflation, the Central Bank of Nigeria (CBN)’s Monetary Policy Stance and the Manufacturing Sector in Nigeria

The Nigerian inflationary trend has continued to move northwards since the beginning of the year. The year-on-year has moved on from 15.6 per cent recorded in January 2022 to 18.6 percent and to 21.09 per cent in October. According to the National Bureau of Statistics (NBS), the year-on-year inflation in October was 5.09 percent points higher than the 15.99 percent rate recorded in October 2021.

The Nigerian inflationary trend has continued to move northwards since the beginning of the year. The year-on-year has moved on from 15.6 per cent recorded in January 2022 to 18.6 percent and to 21.09 per cent in October (see figure 1 below). According to the National Bureau of Statistics (NBS), the year-on-year inflation in October was 5.09 percent points higher than the 15.99 percent rate recorded in October 2021. This implies that the general price level rose by 5.09 percent between October 2021 and October 2022. On a monthly basis, the inflationary trend nosedived from 1.36 percent in September to 1.24 percent in October. This shows that the general price level declined by 0.12 percent in the month of October. This decline in the monthly inflation rate has been consistent in the last three months, from 1.82 percent in the month of July to 1.77 percent in August, 1.36 percent in September and then to the current 1.24 percent recorded in the month of October. This decline is made possible given the harvesting season.

However, the yearly headline inflation has continued to soar. The NBS attributes that to the disruption in the supply of food products and the increase in the cost of importation due to the persistent currency depreciation as well as the general increase in the cost of production such as the increase in energy cost. Unfortunately, this increase is not showing any sign of decline as Russia’s invasion of Ukraine and the lockdown in critical Chinese cities, the major causes of the global inflation that has transmitted to the increases in energy and food costs in the domestic economy is not abating. In Nigeria, the persisting uptrend in energy prices and the prolonged period of scarcity of Premium Motor Spirit (PMS), which contributed to a sharp rise in transportation, logistics and manufacturing costs, which fed through to consumer prices; as well as the contributory legacy factors including the lingering insecurity across the country; perennial flooding in major food producing states; critical deficit of infrastructure in the country; and poor road networks amongst others, are not still showing any sign of abating. This is exacerbated by the excess supply of money in the economy. According to the CBN, about 2.7 trillion naira out of the 3.2 trillion-naira cash in circulation outside the banking industry are another reason why inflation has continued to rise in Nigeria.

To help take control of the money in circulation, and curb rising inflation, the CBN announced a redesigning of 200, 500, and 1000 denominations of the naira which have about 75 percent outside the banking industry. The CBN opined that the redesigning of the naira notes will phase out old notes and render useless huge amounts of raw cash in the hands of politicians, kidnappers and terrorists. The essence of this policy is to mop up excess cash outside the banking industry with a view to handling monetary policy and foreign exchange programs credibly . The redesigned naira notes have been launched on the 23rd of November, the last date for the use of the existing 200, 500, and 1000 notes for transactions in the country is the 31st of January 2023.

Like other monetary policy agencies around the world who are looking for means to curb the increase in inflation in their economies, the Central Bank of Nigeria resorted to incessant manipulations of monetary policy instruments to reduce the quantity of money in circulation in the country. The past meetings of the MPC have seen the CBN implement contractionary monetary policies. The monetary policy rate (MPR) has increased from 11.5 percent in the first four months of the year 13 percent and 14 percent between May and June and between July and August respectively. But with the continuous rise in inflation rate, the MPC raised the MPR to 15.5 percent in September and now to 16.5 percent in the last meeting held on the 21st and 22nd of November 2022 (See figure 2).

The contractionary measure was taken by the CBN in reaction to the increase in inflation rate which again rose to 21.09 percent in October, especially the food inflation which increased to 23.72 percent in October 2022, from 23.34 percent in September 2022 . The CBN noted that a contractionary policy would narrow the negative real effective interest margin and thus improve market sentiment and further restore investor confidence. It also believes that previous tightening stances would have led to the observed decline in the month-on-month inflation rate and could further curb the inflationary trend.  Thus, it decided to sustain the tightening stance to instigate a significant decline in inflation rate.

A tightening monetary policy or an increase in MPR means that the CBN has increased the rate at which it lends to commercial banks. The commercial banks in turn cannot sell below the cost price and/or forfeit its profits or interest. In view of this, the commercial banks will sell at a margin or at the market rate. Hence, this will lead to an increase in the cost of loans in the banks thereby discouraging lending. The lesser the quantity of money in circulation in the economy, the lesser the inflation. According to Milton Friedman, “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. This means that an increase in the quantity of money by a percent would as well lead to an increase in inflation by the same margin. The reverse is the case when the quantity of money in circulation is reduced by the same margin.

Inflation and Economic Agents
Inflation has different impacts on different economic agents. The fixed income earners, salaried workers, employees, teachers, pensioners, creditors, et., are the worst loser during inflation. This is because their incomes do not rise as much as the rise in commodities prices. Similarly, persons who live on past savings, fixed interest or rent, pensioners, government employees, teachers, etc., also suffer during periods of rising prices as their incomes remain fixed. Inflation thus reduces the purchasing power of this set of people, thereby affecting the profits of manufacturing firms. The erosion of real income is the single biggest outcome of inflation.

Inflation takes its toll on manufacturers through cost increases, contract constraints, labour shifts, and input issues, which in turn affects inventory and capital purchases. Inflation decreases customer purchases. This is because with less purchasing power and less money in the bank, consumers tend to buy less. Fewer consumers buy, less profit for companies. This leads to accumulation and increased inventory costs: When replacement inventory costs more than inventory sold, it can lead to an inventory shortage and a reduction in gross profit. Inflation also leads to the increased cost of service as well as transportation costs: During inflationary cycles, the cost of fuel and truck maintenance increases, putting more pressure on gross profit. During Inflation, the lag between employee wages and the inflation rate affects productivity and increases personnel turnover. This leads to decreased output, delayed deliveries, and lower invoicing. Inflation also leads to reduced borrowing and investment capacity.

Addressing Inflation in the Manufacturing Sector
As inflation leads to high prices for goods and shipping, manufacturers are forced to adjust and increase prices and budgets throughout the company to match inflation. In doing this companies have to consider what a customer is willing to pay, the cost of production, and the actual costs of the goods. In another way the manufacturers would need to cut costs to balance the necessary adjustment of price increases. This could be achieved by researching new suppliers and materials, while at the same time ensuring that they maintain quality.
One of the impacts of inflation in the manufacturing sector is that it leads to a decrease in manufacturing sector productivity. The manufacturing companies can work towards increasing productivity. This could be achieved using a limited workforce, thereby reducing the increased cost of production and offsetting the effects of inflation. Inaddition, productivity bonuses and measures proven to increase productivity should be Implemented to boost the remaining employees' productivity while keeping costs low. It is believed that implementing new technology would help reduce the costs of production. Automation and AI technology can help provide more control over operations and help to avoid costly human errors. Addressing inflation at the manufacturing level would help offset the inflation at the consumer level.