The aftermath of the fuel subsidy removal is still a subject of caution to Nigeria’s economic projections, especially, as the citizens continue to lament the bitten economy of ending the fuel subsidy regime by the Tinubu government.
Unfortunately, the entire Nigerian economic environment is in bad shape with so much to bear, from soaring transport fares to unbearable costs of food, goods, and services, not to talk of logistic chain disruption as well as uncertainties in the financial flow, such as income stability.
Whereas the big blow from all of this is the decision of the Central Bank of Nigeria (CBN) led by its Acting Governor, Folashadun Adebisi Shonubi, and the Monetary Policy Committee (MPC) in tightening monetary measures on cash flow in the hope of keeping inflation at bay, with controllable fiat of hiking the interest rate to 18.75%.
Regrettably, inflation is making a mess of our currency, by weakening purchasing power and eroding its value. In the same vein, the rise in stable food prices like bread, cereals, potatoes, yam, meat, fish, oil, rice, and sugar are worries to many Nigerians across all boards.
So what can an interest rate hike do as a monetary instrument to grow the economy of Nigeria?
The first shot at an interest hike under Folashadun Adebisi Shonubi as Acting Governor of the Apex Bank 18.75% with an asymmetric corridor of +50/-25 basis points around the Monetary Policy Rate (MPR) is critical. Although, the reserve bank maintained a Cash Reserve Ratio (CRR) at 32.5% and retained the Liquidity Ratio (LR) at 30%.
However, for the record, since the middle of last year 2022, the CBN in its usual characteristics after its ritual Monetary Policy Committee (MPC) meeting that takes place every quarter, considered hiking interest rate. For instance, between January to July 2023, Apex Bank has consistently raised the rate at 16.50%, 17.50%, 18.50%, and 18.75%.
In retrospective, also, the Central Bank of Nigeria (CBN) raised interest rates to 15%, 14%, 13%, and 11.5% respectively in the past. Interestingly, the significance of this latest 18.75% rate analysts has termed as “a shift to a hawkish monetary policy stance.”
But the call to question how far the previous rates have helped to fight consistent inflation that presently stares us in the face at 22.77% double digits, and for us not to make a mockery of early decision that seems not to have worked for Nigeria’s economy that has so pride itself in a rentier crude oil earnings cannot be overlooked. Because, the common man on the streets of Nigeria wants to feel the impact of these policies and see a reduction in the price of transport, bread, medication, rice, garri, beans, sugar, spaghetti, milk, etc.
For us to start with, we need to demystify what constitutes Monetary Policy Rate (MPR) because a lot of Nigerians are yet to understand how the economy works from that angle.
Simply put, MPR is the interest rate at which CBN lends to commercial banks. The MPR serves as the benchmark against which other lending rates in the economy are pegged. Moreso, it is usually used as an instrument to moderate inflation in the economy.
The aspect that sounds confusing to Nigerians is the benchmark of which banks can lend money to Nigerians and most economists and financial experts find that as the intriguing part of a monetary policy direction. Conversely, it is also the part apex banks tread cautiously.
Although, we acknowledge the fact that there are diverse interests and issues putting pressure on the MPC to increase the benchmark rate despite the inflationary tendencies in the economy; especially, amid the high cost of production, insecurity, dwindling government revenues, import dependency, foreign exchange volatility and the uncertainty in the global oil market.
Paradoxically also, what can monetary policy rates that focus so much on hiking interest rate offer?
Just as we asked early in this piece. Should interest rates be raised by the CBN at this injury time that is filled with huge expectations and anxiety as well as mounting pressure on the Federal Government over the fuel subsidy removal?
Is jerking up interest rates not another bumpy trap for an already tensed ecosystem?
Although, economists and financial experts did argue that, there is no universal rule when it comes to raising or lowering the interest rate. Nevertheless, what the central banks should be interested in is minimal stability. And this comes with its issues, especially for developing economies like ours with its peculiar challenges, poorly managed and hugely suffering from fiscal imbalance, government debt, corruption, and poor revenues.
Instructively, the CBN Acting Governor, Folashadun Adebisi Shonubi, said the hike in interest rate would help address Nigeria’s rising inflation. This is quite bold going by the latest Nigerian inflation rate standing at 22.77 per cent.
Unfortunately, Nigerians are not comfortable with the rationale behind the CBN’s interest rate hike. With the clear understanding that raising interest rates is not a solution to the inflation problem.
Sadly, inflationary pressure in Nigeria is fueled by rising prices of fuel, leading to cost-pushed in the manufacturing sector, high cost of transportation in the supply of goods and essential commodities.
Succinctly, a critical look at the CBN’s decisions in hiking interest rates is for us to think through with the anticipation that retooling interest rates to grow the economy is desirable.
As measures to move away from a mechanism of anti-crisis monetary economic policy that may not have worked well, the previous regime of the Apex Bank aimed to attract an increase in stock and bond sales on the stock markets and to maintain liquidity in the financial systems, as it is currently done in developed nations, to mop up excess cash in the system.
However, the hiking interest rate in our clime could further be counteracting an economic crisis such as adding to the 33 per cent unemployment rate, failed manufacturing sector, dwindling investment environment, and weakening citizens’ purchasing power and income, amongst others.
We believe that the CBN means well for Nigerians, but its policy on the other hand, is contradictory to better the welfare of the people, particularly in closing the gap in Nigeria’s micro and macroeconomic situation, either to further boost employment, alleviate poverty and re-engineer investment.
What needs to be done?
We acknowledge that the current predicament is not just peculiar to us, but we are not shy about telling ourselves the truth.
Firstly, Nigerians are interested in a stable economy that should be far away from the already torturing economic situation, and this requires strong pro-people monetary and fiscal policies that have an effect on the real economy.
Secondly, our interest rate should be adaptable to our macroeconomic development needs while tackling the energy, manufacturing, and agricultural sector.
Thirdly, we emphasize the need for the reserved bank of the nation to see reasons to retool its monetary policy as measures to improve fiscal and trade policy, which would give an opportunity for sound credit not to hinder growth through credit facilities.
Lastly, we are a nation with a democratic governance system, so the Nigerian state must factor in the issues of ideal palliative programmes beyond throwing money at the problem. It’s time the government takes these issues into account when making decisions, especially as social unrest and the possibility of political risk are highly associated with a high cost of living, and the labour union calls for a protest, which is something the economy cannot put up with.
Given the aforementioned, what is paramount is not just hiking interest rates, but an impactful monetary policy favourable to Nigeria’s economic development, so the CBN must understand it is time we retooled interest rates for the citizens’ wellbeing.
Adefolarin A. Olamilekan
Political Economist
Email: [email protected]
Tel: 08107407870
