Business

Recently, on March 21, the Central Bank of Nigeria, CBN, announced an increase in the interest rate from 17.5 per cent to 18 per cent. This decision has generated some reactions from experts and stakeholders. While some believe that the decision was right, others argue that the apex bank could have adopted other measures to tackle the rising inflation and other policy issues.

By Kennedy Nnamani

THE recent hike in interest rate by the Central Bank of Nigeria, CBN, to 18 per cent from 17.5 per cent has attracted mixed reactions from economic experts and other stakeholders because of its effects on businesses, especially in the face of financial crisis caused by the currency redesign policy of the CBN.

Speaking at the last meeting of the Monetary Policy Committee, MPC, of the central bank, Godwin Emefiele, Governor of the CBN, noted that the apex bank decided in favour of the decision to increase the benchmark interest rate by 50 basis points and pegged the liquidity ratio at 30 per cent in order to check inflation, which currently stands at 21.91 per cent by tightening the interest rate.

“The rate of acceleration or increase in inflation has slowed down because of the tightening measures adopted by the CBN.

“The MPC was convinced that the tightening measures have started to reduce the rate of increase in inflation. We believe that as we continue this process, inflation will begin to trend down,” Emefiele said.

He added that the Nigerian economy has maintained a positive growth trajectory for nine consecutive quarters, since exiting recession in 2020, noting that the improved performance of the economy has been driven largely by sustained growth in the services and agricultural sectors.

However, despite the projections of the central bank, there appears to be some reservations by some economists and other stakeholders. Although some of them agreed that tightening the interest rate has a direct relationship with taming inflation, others still believe that the country does not need a strict economic policy as the nation is still battling with some economic issues such as cash crunch, political instability, insecurity among others, thus wishing that the CBN would have adopted other viable options to address the rising inflation.

Reacting to this development, Chinyere Almona, Director General, Lagos Chamber of Commerce and Industries, LCCI, stated that increasing the interest rate would not tame inflation, thus suggested that alternative instruments of monetary policy should be preferable in achieving the anticipated results of price control.

In a statement issued in Lagos on March 24, 2023, Alumona said: “While the CBN has the overarching mandate of ensuring price stability, we suggest it should not be done in a manner that compromises growth, especially in the face of high unemployment.

“Inflation chips away at purchasing power, leads to inventory stockpiles, undermines growth, and creates a lot of economic uncertainties. Taming it, however, should not be done at the expense of growth and the most vulnerable sectors.”

In the same vein, Muda Yusuf, Director, Centre for the Promotion of Private Enterprise, said that the increase in the interest rate would directly affect investors. This decision, according to him, will lead to increased burden to both local and foreign investors.

Yusuf, who is also a former director of the LCCI, said that the CBN would have been more empathic in its policy, considering the pains brought by the cash crunch (which is already gradually fizzling out).

However, some other economic analysts believe that the 18 per cent increase could worsen the inflationary trend. For instance, Muktar Muhammed, a financial analyst, argues that the shortage of banknotes and its effects on the economy could not necessitate a hike in interest rates. He added that inflation was already high, thus, increasing the rates, together with the scarcity of cash would not help the economy.

“The challenge with Nigeria is not just that we are dealing with an inflation that has to do with single-digits, we are also dealing with an inflation that is driven by three major factors.

“The factors are micro economy, demand and supply, and production. So, we will need a holistic approach which cannot just be saved by rate hike,’’ the News Agency of Nigeria, NAN, quoted Muhammed as saying.

Muhammed therefore advised the CBN to consider the cost of borrowing in taking monetary policy decisions. “In the area of micro economy stability, we need to begin to look at the cost of borrowing, if reduction in the cost of borrowing is going to help tackle inflation.

“Also, looking at the cost of production, we will begin to look at the power sector and the high cost of energy. Inflation cannot be solved with just one tool, it needs to be looked at holistically, especially in the area of production, cost of doing business and micro economy stability that has to do with borrowing mostly for startups,” he added.

In his reaction, Okechukwu Iwegbu, a former President of Chartered Institute of Bankers of Nigeria, CIBN, noted that a hike in interest rate will have a negative impact on the economy.

Iwegbu raised concern that increasing the rate would directly affect business owners or intending investors as it could be difficult for people to raise capital for their businesses. He therefore suggested that the CBN consider other factors like taxation.

“Inflation rate, which is the major reason why the committee raised the MPR, will not abate. The MPC should look at several other factors like taxation.

“The tax rate is important because there are multiple taxes in Nigeria, from the Federal Government to state and local governments. Almost all government agencies are collecting taxes.  The taxes should be harmonised so that many more Nigerians can be brought into the tax net. This will be more impactful on the economy,’’ he said.

And for Prof. Uche Uwaleke, a Professor of Capital Market at the Nasarawa State University, Keffi, the MPC should have maintained the previous rate, considering the cash shortage that the nation faces.

“I had expected the MPC to maintain a hold position considering the significant drop in currency in circulation occasioned by the currency redesign policy. The adverse impact of the recent cash scarcity on productive activities as well as the conclusion of election season should have provided justification for a hold position,’’ he said.

In the same vein, Bismarck Rewane, CEO, Financial Derivatives Company Ltd, noted that although there is a relationship between increasing interest rate and curbing inflation, interest rate is not the potent tool for curbing inflation

Speaking on Channels Television programme on March 21, 2023, Rewane remarked saying: “is there a relationship between increasing interest rate and curbing inflation? The answer, technically is yes, but that is not all.

“The reality is that we have increased interest rate cumulatively by about 6.5 per cent all together, but inflation has actually increased by about 5.6 per cent since that time (actually it declined marginally by about 0.19 per cent),”.

According to him, the impact of the hike in interest rate is strengthening the Naira against the Dollar.

“In a perverse way, it has made the Naira stronger, it traded at 745 against the dollar today. It is going to increase the lending rate to the economy; banks’ lending rate should be about 28-30 per cent per annum, which is actually cut throat.

He also said that the increased rate would equally positively impact on the prices of stock due to their inverse relationship.

“Stock prices would actually come down because there is an inverse relationship between stock prices and interest rate,” he said.

However, he noted that the MPR is the signal rate and not the effective rate.

According to him, the effective rates of saving in Nigeria is the treasury bill, however, savings rates are still way below and the target for inflation in Nigeria is between 6-9 per cent, but the country is now at almost 22 per cent.

“So in reality, you are way off your target,” Rewane added.

He, however, recognised that Nigeria is not in isolation with this persistent inflation considering that other African countries as well as the developed economies are affected. According to him, what went down has gone up again.

Despite the numerous views expressed against the hike in interest rate, the CBN appears to maintain its stance and it is mopping up the excess cash in circulation to make cash less attractive to the people.

In addition, the prices of some commodities, especially perishables, food baskets as well as some services like transportation marginally dropped during the 12 weeks of cash scarcity.

In spite of the marginal gains of this hike in interest rate and the Naira redesign policy, economic experts and other stakeholders are quick to point out the negative effects of this twin shocks adopted by the CBN in tackling inflation since there are other effective measures that could have been adopt. Perhaps more consultations should be adopted by the CBN in future rather than causing such costly harm on the nation’s economy and pains on the people.

KN

Tags: Central Bank of Nigeria Chinyere Almona CIBN Godwin Emefiele Kennedy Nnamani LCCI MPC Muda Yusuf Muktar Muhammed Okechukwu Iwegbu