The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has raised the benchmark interest rate from 14 to 15.5 per cent. The increase in the Monetary Policy Rate (MPR) represents a 150 basis-point raise recorded during the MPC meeting in July. The latest interest rate hike, which is in response to galloping global and local inflationary pressures, is the third in five months. Ten members of the MPC voted in favour of the hike.
Also, the MPC raised the Cash Reserve Ratio (CRR), which is the share of a bank’s total customer deposit kept with the CBN as cash, to 32.5 per cent from 27.5 per cent. The decision to hike the MPR and CRR rates comes with economic and financial implications, both for businesses and the banking industry.
According to the governor of the CBN, Godwin Emefiele, the increase was targeted to moderate inflation, adding that the “tested monetary policy theory is that the easiest way to tame inflationary pressure is to increase rate.” However, many analysts believe that the decision is not favourable to cash-strapped businesses, especially the Small and Medium Enterprises (SMEs). It is not even in favour of the banks. In May 2022, the MPC raised the MPR from 11.5 to 13 per cent, and further to 14 per cent in July, before increasing it again to 15.5 per cent, in September. The global economy is now in its steepest slowdown, the first of its kind following a post-recession recovery since 1970.
And as a result, many central banks in Europe and America have been increasing interest rates, but not at the level at which the CBN has done lately. The CBN must be cautious in rates hike to avoid policies that might worsen our economic woes. In view of the fact that our economy is not as resilient as those of advanced economies, constant resort to rates hike has the potential to hurt capital inflows, cost of borrowing by the government, stock market performance and output growth in general. Interest rates hike could negatively affect asset quality of banks as they would want to reprice their loans in response to the hike.
The economy has been wobbling and experiencing sluggish growth in the past seven years. The World Bank and the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA) have kicked against the rates hike. They opine that raising interest rate does not necessarily mean that investors will be attracted to a country or persuaded to remain. The CBN is probably banking on the assumption that investors often expect central banks to raise MPR to almost four per cent through 2023, an increase of more than two percentage points over their 2021 average. But, sometimes, it does not work that way. Instructively, the World Bank recently warned Nigeria and other developing countries that simultaneous rate hike in response to inflationary pressures could trigger a recession and other financial crises. Nigeria had already witnessed two recession between 2016 and 2018, and a third recession could have more adverse effects. Only very few countries will survive three recessions without serious socio-economic consequences. This is why the CBN must be circumspect in increasing interest rates. In its report: “Risk of Global Recession in 2023,” the World Bank said the trajectory of interest rate increases and other policy actions might not be sufficient to bring inflation down to levels it was prior to the pandemic of 2020. Nigeria’s inflation rate has been on a steady rise since then, peaking at 20.5 per cent, the highest in 17 years. According to the World Bank, unless supply disruption subsides, interest rate increases could leave global inflation rate at about five per cent in 2023.
This will be nearly double the five-year average before the pandemic broke out. We still maintain that one of the ways to navigate out of Nigeria’s current economic challenges and stimulate growth is to shift focus from consumption to boosting our production base. Government must generate additional investments and improve productivity and capital allocation, all of which are critical for growth and poverty reduction. We believe that an economy that is heavily import-dependent, the way to go is to invest more in production rather than consumption. It is necessary to reduce our borrowings as is currently the case. In addition to the promotion of exports, let government harmonise the exchange rate which is now at all-time high, and encourage import substitution.
While we support every effort to check the current soaring inflation, we urge the CBN and the government to design creative monetary and fiscal measures that will lead to economic recovery and growth. An aggressive diversification of the economy is one of the options among many others. The economy should not be allowed to collapse under the weight of inflationary pressures and other fiscal burdens.