CBN’s rate hikes seen hurting economy in Q2

The jumbo interest rate hikes by the Central Bank of Nigeria (CBN) since February is expected to take a toll on economic growth in the second quarter, according to multiple economists and analysts.

The National Bureau of Statistics (NBS) reported on Friday that Africa’s most populous nation saw its Gross Domestic Product (GDP) rise to 2.98 percent in real terms in the first quarter of 2024 from 2.3 percent in the same period of 2023.

Compared to the previous quarter, growth slowed from 3.46 percent in Q4.

The forecasts for the second quarter are not as good however, with economists expecting the CBN’s interest rate hike to hurt economic output.

“The year-on-year growth makes sense given that in the first quarter of last year, we were affected by the uncertainty about currency replacement, fuel queues, and elections,” Ayo Teriba, CEO of Economist Associates, said.

“However, the tightening measures by the CBN that started in February are likely to take their toll in Q2 and subsequent quarters,” Teriba added.

Last week, the apex bank raised its monetary policy rate for the third straight time by 150 basis points to 26.25 percent in a bid to fight inflation and defend the ailing naira. That takes the total hikes since February to a combined 750 basis points.

The rate hike will slow economic growth and reduce consumer spending, according to analysts at FBN Quest.

“Ultimately, the impact on the general economy could be a potential slowdown in economic growth, with consumer spending suppressed, and a decrease in business investments,” FBN Quest said in a recent note.

The NBS report also revealed that the performance of the economy in Q1 was driven mainly by the services sector, which recorded a growth of 4.32 percent and contributed 58.04 percent to the aggregate GDP.

It said the agriculture sector grew by 0.18 percent, from the growth of -0.90 percent recorded in Q1 2023.

“The growth of the industry sector was 2.19 percent, an improvement from 0.31 percent recorded in the first quarter of 2023. In terms of share of the GDP, the services sector contributed more to the aggregate GDP in the first quarter of 2024 compared to the corresponding quarter of 2023,” the report added.

Ikemesit Effiong, head of research and partner at SBM Intelligence, said services have an out-sized exposure to the effect of monetary policy. “Since growth was largely powered by services, I would expect some slow growth in Q2. But I don’t think the slowdown might be actually significant. It might just be around 2.4-2.5 percent.”

A breakdown of the report shows that the top 10 sectors that contributed to the growth were crop production (19.24 percent), trade (15.70 percent), telecommunication & information services (14.58 percent), crude petroleum (6.38 percent) and natural gas and financial institutions (6.35 percent).

Others such as real estate, food, beverage and tobacco, construction, professional, scientific and technical services, and other services contributed 5.20 percent, 5.11 percent, 4.01 percent, 3.19 percent, and 2.51 percent respectively.

Analysts at Comercio Partners said in a note on Friday that the GDP growth rate has been slower yet steady, hovering around three percent from 2021 to 2023.

“The central bank had hiked the MPR by a hefty 600 basis points to 24.75 percent to curb inflation in March. Despite these efforts, inflation has been stubbornly high, hitting a record 33.69 percent in April, eroding consumer purchasing power. The increased interest rate has also raised the cost of borrowing for real sectors, stifling economic growth,” they added.

Last May, President Bola Tinubu scrapped a costly but popular petrol subsidy and lifted currency controls in June, which he said was to save the country from going under.

But his actions have worsened inflation currently in double-digits and at the highest level on record. The rising inflationary pressures have weakened the purchasing power of consumers, even as businesses grapple with higher operating costs.

The removal of the petrol subsidy tripled the petrol price to above N600, causing public transportation providers such as buses, tricycles, and motorcycles to raise transportation fares.

The naira suffered a near 30 percent devaluation this year following a 40 percent devaluation last June.

According to the NBS, headline inflation quickened for the 16th straight time to 33.69 percent in April, up from 33.20 percent in March.

Food inflation, which constitutes more than 50 percent of headline inflation, also increased to 40.53 percent.

Rising inflation and sluggish growth in one of Africa’s biggest economies increased the number of poor people to 104 million in 2023 from 89.8 million at the start of the year, according to the World Bank.

Muda Yusuf, chief executive officer of the Centre for Promotion of Private Enterprises noted that his projection for Q2 is conditional if the country is able to sustain the improvement in oil output as reported by the Nigerian National Petroleum Corporation (NNPC) Limited

“We might see a positive growth in Q2 if the improvement in oil production is sustained and the CBN is able to come up with a fragmented work to reduce the volatility in the forex market because it is affecting confidence and fueling speculation,” he added.

Reacting to the latest rate hike by the CBN this month, Joseph Nnanna, Chief Economist, Development Bank of Nigeria, also said that the move might impede real sector growth and hinder GDP growth this year.

“The 150bps rate hike is pernicious to the real economy as households and MSMEs will feel the impact immediately,” Nnanna said.

“However, the rate hike has a signalling effect on the fiscal authorities. It is now left to the fiscal side to respond to the signals. They need to improve fiscal discipline and prioritise spending to improve growth. I suspect that real GDP will not get to 3.3 percent,” he said.

He also stated that the CBN might not achieve their inflation target of 21 percent this year, but may bring the rate down to 24.5 or 28 percent if the hike continues.

Biodun Adedipe, Chief consultant, Biodun Adedipe Associates, who also agreed that the incessant rate hikes by the CBN will slow growth urged the fiscal authorities to swing into action.

“We seem to be overplaying the monetary policy tune when we should face the fiscal authorities squarely as the ball is now in their court,” Adedipe said.