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The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) at its first meeting of 2023, last week, raised the benchmark interest rate to 17.5 per cent. This was in spite of the advice from the organised private sector and other stakeholders. At the end of the MPC meeting, the CBN Governor, Godwin Emefiele, explained that the decision to increase the interest rate was taken to rein in inflation.
He also pointed out that the previous hikes had started to yield the expected results. However, Emefiele believes there is still need to further tighten the fiscal and monetary policy instruments. All the same, it retained the Cash Reserve Ratio (CRR) at 32.5 per cent as well as the Liquidity ratio at 30 percent. There was a slight drop between the current inflation rate of 21.04 per cent for the month of December, 2022 per cent from the 21.09 per cent for November, 2022. Expectedly, the latest hike in interest rate has attracted diverse reactions, even as the apex bank has assured of the effectiveness of its monetary policies amid inflationary pressure and its impact on rising prices of goods and services and weakening disposal incomes of the people.
In fact, inflation is the biggest accelerator of poverty. Ameliorating it will require both fiscal and monetary tools. The country is still battling with huge debt burden, with over 80 per cent of revenue used in servicing the debts. The unsustainable debt will lead to slow economic growth.
Despite the interest rate hike, many Nigerians are calling for the liberalisation of the lending environment in favour of manufacturers and others in the export sector. It is our view that the disadvantage of the hike in MPR benchmark appears to outweigh its advantage. An increase in the lending rate will lead to a higher cost of funds to individuals and businesses already grappling with the excruciating funding environment.
Currently, the cost of borrowing by businesses, manufacturers and small and medium enterprises will increase as banks are already repricing their assets and loans. Raising the interest rate may likely not translate to increased foreign direct inflows due to the present foreign exchange (fx) challenges. Rather, it will lead to higher cost of production and higher inflation.
Nigeria is not only dealing with rising inflation, it is also beset with rising unemployment and slow growth in public and private sectors, weak revenue generation, poor investment inflow, high national debt, and heightened insecurity. For instance, the debt servicing to revenue ratio of the government is already too high. In the current 2023 budget, the N12trillion deficit may worsen Nigeria’s debt that stands at over N46trillion. This excludes the N22trillion Ways and Means from the CBN.
Apart from the latest monetary intervention, diversification, especially in the non-oil sector, remains one of the imaginative options to stabilise the economy. It is a sector that has the potential to steer Nigeria away from the consumption base, to a production economy.
There is need to broaden the revenue base and increase investment in the production sector. Borrowing for consumption has become a threat to the survival of the country. Let the government reduce inflation by implementing policies that support macroeconomic stability, inclusive growth and job creation. Households must be protected from the impacts of inflation. Small and medium enterprises should be made to have access to funds.
The economy needs a single digit inflation rate for it to achieve sustainable growth. Any inflation rate that is higher than 12 per cent is not good for economic growth and development. Therefore, excessive reliance on monetary policy alone is not likely to tame inflation. Revamping the economy requires pragmatic strategies.
The current reliance on monetary policy alone may not work. The slow growth of the economy is probably why many Nigerians are being impoverished. Nigeria is Africa’s largest economy by Gross Domestic Product (GDP), but with less than 4 per cent growth, it has Africa’s lowest tax-to-GDP ratio. Based on this, it cannot stimulate the expected growth.
The CBN should address factors that lead to inflation and put the economy on the path of recovery and growth. Regrettably, the economy has not grown beyond an annual rate of 2.5 per cent that should reflect the resilience of consumers and businesses. That is why there are fears over another recession.
