Mixed feelings trail new rates hike

Okey Onyenweaku

The Central Bank of Nigeria (CBN) has intensified its efforts to tame the soaring inflation levels in the country which has presently hit the roof top at 21.9 per cent.

As a result, the apex regulatory authorities rose from a Monetary policy Committee meeting last week  to announce  the raising of its  benchmark interest rate, by 100 basis points to 16.5 percent to essentially fight inflation.

Experts believe that  in economic terms, inflation is the rate at which the general prices for goods and services rise in a given country.  They explain that being a volatile metric, inflation that can rise and fall rapidly depending upon economic conditions and the measures a government chooses to control or counteract the phenomenon. Inflation is connected to the economic principles of supply and demand and can be viewed positively or negatively depending on the specific situation and the rate of change.

However this development is the fourth straight rate hike this year and raises its own issues.
On the surface of affairs though, the highlights of the MPC meeting included: increase MPR by 100 basis points to 16.5 per cent; the asymmetric corridor of +100/-700 basis points around the MPR was retained; the CRR was retained at 32.5 per cent; while the Liquidity Ratio was also kept at 30 per cent.

It will be recalled that the apex bank had increased the MPR from 11.5 per cent earlier this year to 15.5 per cent across three consecutive rate hikes.

That notwithstanding, inflation rate rose to 21.09 per cent in October 2022 from 20.77 per cent in the previous month.

Godwin Emefiele, governor of the apex bank, said the hike in interest rate would continue to help tame rising inflation.

According to Emefiele, at this time of high inflation, loosening rates “would greatly jeopardise the gains of previous policy rate hikes”.

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He said due to all the causative factors such as the Russia/Ukraine war, supply chain disruptions, the slowdown in China, rising inflation in advanced economies, and other headwinds, it became dominant that a losing option was not desirable at this meeting.

“With a rise in inflation, loosening the stance of policy will lead to a more aggressive rise in inflation and will erode that gain already achieved through tightening as regards whether to hold MPC was of the view that they won’t stand at the period close to December festive and expected heavy spending during 2023 general election,” Emefiele said.

“MPC decided to continue to tighten, but at a somewhat more moderated rate, noting that tightening the stance of policy would narrow the negative real effective interest rate margin and force improve market sentiment and further restore investors’ confidence.”

Emefiele further said the continuous tightening was yielding many results.

“The committee uses the opportunity to appraise the efficacy of its decisions at the last meetings and came up with the conclusion that the decisions were beginning to yield the desired results, given that the rate of increase in inflation was beginning to moderate your view of the month or more deceleration and prices presented by the NBS consumer price indices,” he added

“Members noted that though the global economy was progressively weakening due to the various headwinds, the recovery domestic output growth remained positive as a result of the continued support from fiscal and monetary policy.

The apex bank governor, therefore, urged authorities to continue to harmonise its various policies to achieve the desired objectives of stable prices and steady growth.

Recent hike in rates have raised a lot of concern given the already excruciating operating environment. There have also been mixed feelings about it though more on the criticisms side.

Analysts fear that this may worsen the already tough situation for many Nigerians.
The former President of the National Association of Small Medium Enterprises, Mr Degun Agboade, voiced out that the association was complaining about the old rate before even the current hike!

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“We are in a worse situation. Nothing has improved in terms of infrastructure. In fact, the infrastructure is getting worse. You can’t move on the roads; diesel price has moved up, and there are a whole lot of problems. In the midst of that, you still raised the interest rate? That is adding insult to injury.”

On his part,  Jonathan Aremu , a professor of Economics at Covenant University, Ota,  said the decision of CBN’s MPC reflected an economic theory that stated that for an economy to remain robust, the quantity of money in circulation must reflect the volume of production and consequently the volume of trade/transactions.

The Deputy-President of the Lagos Chamber of Commerce and Industry, Dr Gabriel Idahosa, had recently criticised the MPC’s rate hikes in an interview.

“Our own economy cannot stand this kind of rate hikes, where you have collosal unemployment and inflation. Manufacturers are not able to cope with current interest rates because of the cost of production. Diesel alone is sending many of them out of business. If you now add a high-interest rate, it’s not good for businesses that are already suffering from those other issues of inflation and power supply. They are supposed to do it on paper because the monetary policy says if you have inflation, you should increase interest rates,” he had said.

The Director-General of the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture, Sola Obadimu, had also condemned the attempt to curtial the excesses of inflation through the hike in monetary policy rate  saying it would worsen the situation.

“I have been saying this, the increase in the monetary policy rate has not been working. Since they decided to raise the MPR, has it brought down inflation? It has not. And manipulations by the monetary policy committee cannot bring down inflation.

“They are trying to deal with inflation, but they are not succeeding.  The naira is getting weakened so inflation will continue. There are also fears of the regularisation of fuel prices that is looming. All these things will impact inflation. The hiking of interest rates has not stopped inflation from going up. Now, this means that the commercial bank will now be lending at a 20 -25 per cent interest.

“I doubt if any loan can go for lesser than that. This means we will continue to experience this cost-push inflation because of cost the  your input is going up. There is no way you can sell at a lower price. It is normal and the cost of money is also one of the inputs. You are taking a bank loan and there is the cost of servicing and paying back with both principal and interest. These things can only aggravate the situation. There is a need to inject capital into the system and strengthen infrastructure, it is not a day job. So all these manipulations can only work in the short term.”

In his words, Temitope Akintunde, who is Director, International and Public Sector Relations, Lagos Chamber of Commerce and Industry  noted,  “The hike in interest rate is to curb inflation but doing this will lead to higher interest rates. Many businesses are already going through the challenges, from cost of the production to cost of doing business. So, increasing the interest rates at this time is also going to add to the many problems that people already have. The forex issue is also still existent. This is something that a lot of businesses are grappling with.”

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The MPC should focus on ways of addressing the issues of supply side to tackle permanently the deteriorating inflation in the economy said the Chief Executive Officer for Promoting of Private Enterprise, Dr. Muda Yusuf while CEO of Cowry Assets Management Limited, Mr. Johnson Chukwu warned that continuous hiking of interest rates was a recipe for contracting the economy.

This MPC decision will lead to a contraction in economic activities. If we continue in this trajectory (tightening of monetary policy), cost of credit will increase, and cost of goods will go up. In simple term, the cost of credit will increase beyond the gross margin of businesses. As such, banks will only lend to only traders.  We are going to shut down the productive sectors with this stance. The question is, will this decision increase the volume of foods produced? I think the decision may have very hard unintended consequences,” he also explained.

Experts believe that every aspect of business in Nigeria was grounding to halt give costs among other challenges that have been thrown up by the harsh operating environment.

The International Monetary Fund has said that it expects inflation pressures to be significant around the world in 2022. Inflation is predicted to be worse in developing economies, where price increases are projected to reach 9.9 percent on average over the course of this year.

Findings show that the following countries are the top ten with the highest inflation rates in January 2022,  include; Venezuela— 1198.0% , Sudan—340%, Lebanon—202%, Syria —139%, Suriname—63.3%, Zimbabwe—60%, Argentina—51.2%, Turkey—36.1%, Iran –35.2% and Ethiopia—33.0%

As a result many countries have had to raise their interest rates to fight inflation. Countries which have raised their rates in recent times are; The United Kingdom raised its rates from 2.5% to 3%; United States of America from 3% to 3.25%; Canada 3.25% to 3.75% Saudi Arabia from 3.75% to 4.5%; South Africa 6.25% to 7%.

What ever may be the case, the Nigerian economy which has recorded a GDP growth of 2.5% in the third quarter 2022 is still in bad shape. The economy has suffered immensely to the point that its debt over hang has become a threat to the continued solvency of the country.

Critically, recent statistics reveal that the rate of unemployment, the second highest in the world is 40%. At the same time, the underemployment rate stood at 25%; even as inflation, which is hitting the roof top stood at 20.6 per cent( A report said inflation stood at 52 per cent) ,highest point in the last seven years. At the same time, Diaspora remittances inflow has fallen below what it was in 2020.

Also remarkable is the country’s heavy debt burden at N43trillion ($103bn)and expected to grow higher at the end of 2022 and still growing; of the budget of N17.6 trillion for 2022, budget deficit stood at over N6trillion as over 101 per cent of revenues is used to service debt. More worrisome is that the country has set new borrowing limit from 25 per cent of GDP to 40 per cent of the GDP. This was contained in the Medium Term Debt Strategy.
The major revenue earner for the country, crude oil price, which has hit $80 pbd and above presently still fluctuates.

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Insecurity has not only hobbled agriculture, many parts of Northern Nigeria have been taken over by bandits such that not much business activities can subsist. The World Bank just noted that Nigeria’s revenue to GDP ratio hovered between five and six per cent last year and remains the lowest in the world.

These days almost every everybody is aware that Nigeria is the poverty capital of the world recently over taking India with over 100 million people. The Naira which sold at N220/$ in June 15, 2015 has depreciated by about 100 per cent to N730 as at November 11, 2022.

With the fearful scenario above, economic trajectory of the country is still uncertain. This is because even the apex bank has warned that care must be taken to galvanize and push the economy out of slumber.

FDI is expected to shrink to reflect the worsening operating environment and investment climate, analysts reckon.
Further explanations consider some of these risk components to include; the political risk components, government stability, socioeconomic conditions, investment profile, internal conflict, external conflict, corruption, religious tensions, democratic accountability, and ethnic tensions have a close association with FDI flows.

The above scenario, in fact, captures dramatically what Nigeria is experiencing today. Analysts are in awe how such economy can give hope of pulling up surprises in the near future. They seem discomforted that the same vulnerabilities that impeded economic growth pre-Covid-19 are still visibly predominant in the system and are even worsening.

In a recent forum, Dr. Abiodun Adedipe , MD/CEO of B. Adedipe Associate limited, bared his mind and told the audience  that the pre-Covid-conditions which obstructed economic broadening  were still there and have not changed.

According to him, these vulnerabilities included resource dependent/mono-product that  accounted for almost 90 per cent of Nigeria’s foreign trade earnings in 2020 were from hydrocarbons; Portfolio investments evaporated; highly- indebted; large informal sector; weak MSME’s represented large proportions of GDP and manufacturing activities; large populations and high poverty incidence.

According to the report released in Singapore, Nigeria was ranked very low in governance, leadership and foresight, scoring the country 102 out of 104 countries with a score of 0.319 points, ahead of Zimbabwe and Venezuela.

It also ranked Nigeria low in other parameters, scoring the nation 98 in leadership and foresight;   85 in robust laws and policies; 101 in strong institutions; 88 in financial stewardship; 97 in attractive marketplace; 72 in global influence and reputation and helping people rise 98.

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Unlike Nigeria, Finland ranked number one with 0.848 points followed by Switzerland; Singapore; Netherlands; Denmark; Norway; Sweden; Germany; New Zealand and Canada.
These limiting conditions will obviously rob Nigeria of sustainable growth as envisaged by the Chairman of Fidelity Bank Plc, Mr. Mustafa Chike-obi who believes the country needs to grow by 10-15 per cent consistently for about 10 years to achieve a meaningful milestone.