With economic growth still struggling and inflation surging, the latest hike in interest rate by the Central Bank of Nigeria (CBN) has been greeted with skepticism. Last week, the Monetary Policy Committee (MPC) of the CBN raised the benchmark interest rate from 15.5 to 16.5 per cent.
The CBN Governor, Godwin Emefiele, who announced the decision at the end of the MPC meeting, said it took the decision to rein in inflation and maintain economic stability. The October inflation rate released recently by the National Bureau of Statistics (NBS) was 21.09 per cent, the highest in almost two decades. The 16.5 per cent interest rate is the fourth this year that the MPC has raised the benchmark interest rate, which is the rate the commercial banks borrow from the apex bank. However, the Committee voted to retain the Cash Reserve Ratio (the minimum that a commercial bank is required to maintain with the CBN as liquid cash) at 32.5 per cent and Liquidity Ratio at 30 per cent.
Emefiele explained that the CBN weighed various options before taking the decision. But he disclosed that the opinion to reduce or loosen interest rate was not considered as this would adversely undermine the gains of the last rate hikes. In May, it raised interest rate to 13 per cent, in July 14 per cent, and September, 15.5 per cent.
Against the complaints by some stakeholders, especially the Organised Private Sector (OPS) that the latest hike will adversely hurt businesses in the country, the CBN insists that inflation rate will likely fall below 15 per cent by end of 2023. Even at that, it is much higher than its own recommended single digit of 9 per cent it envisaged a few years ago. Its latest projection is reportedly based on its data that inflation could fall steadily to less than 15 per cent by the end of next year. It is doubtful that the projection will materialise considering the possible outcome of next year’s elections that will likely impact on both fiscal and monetary policies, including the exchange rate, which has already affected the value of the naira against other major foreign currencies.
We are aware that contractionary monetary policy has become a popular method of controlling inflation by reducing the money supply within the economy by increasing interest rates. However, raising the cost of borrowing, which this method often entails, will, all things considered, hurt businesses. The immediate concern is that the latest hike in interest rate will hurt business operations, including the cost of production and other supply chain management. For instance, operators in the manufacturing sector have watched helplessly as their debts to banks have risen from N4trillion in December 2021, to N5.1trillion in September, 2022, according to the CBN’s Sectoral Analysis of Commercial banks’ credits. This means that manufacturers borrowed N1.01trillion between December 2021 and September 2022. With the increase in debt, the present double-digit interest rate will impact unfavourably on cost of raw materials and competitiveness of the sector, and possibly lead to shutdown of factories.
With the current interest rate, the cost of borrowing by big and small businesses will increase. This will affect their contribution to the Gross Domestic Product (GDP). Already, these businesses are contending high energy costs, infrastructure deficit, foreign exchange scarcity and insecurity. Between 2017 and 2020, data from Manufacturers Association of Nigeria (MAN) showed that about 320 factories closed down as a result of government’s unfriendly policies. Recently, the OPS petitioned government over the proposed tax on alcohol and non-alcoholic beverages, and said the move will reduce revenue by more than 40 per cent. The economy is grappling with high unemployment and soaring food prices as a result of high rate of inflation due to cost of production, demand and external pressures.
We believe that the monetary authority has not really tamed the rising inflation. It is doubtful if the latest hike will moderate inflation. The fear is that the failure of the CBN to bring down inflation may lead to unintended consequences on the economy, mar the productive sector and weaken economic growth. The monetary authority should address the supply side and find permanent solution to soaring inflation. If this is not done soon, contraction in key economic activities is most likely. Cost of credit may also increase beyond the gross margin of businesses, as banks will only lend to desperate traders. In the end, the economy stands to lose.
Henceforth, the CBN should be more forward-looking in taking decision on interest rate. In view of the bleak outlook of global market compounded by the Russian/Ukraine war, innovative policy measures have become necessary to manage the demand and supply of foreign exchange (FX), both in short and long terms. Therefore, reining in the rising inflation must be handled with utmost caution.
