• Wednesday, June 12, 2024
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Nigeria’s aggressive rate hikes: Short-term fix or long-term gamble?

Nigeria’s aggressive rate hikes: Short-term fix or long-term gamble?

The economy is heating up, with hot money continuing to flow as the latest Monetary Policy Committee (MPC) meeting results in a significant hike in the cost of credit. The Monetary Policy Rate (MPR) has been increased by 150 basis points, rising from 24.75 percent in March to 26.25 percent.

This new interest rate hike defies the expectations of many analysts, who had projected a more modest increase of 100 basis points to combat stubborn inflation.

In just four months, the MPR has been raised by a staggering 750 basis points. Despite this aggressive strategy aimed at economic stability, inconsistency in policy remains a significant issue.

Read also: Nigeria economy gets $1.5 billion inflow days after MPC meeting, says CBN 

TotalEnergies CEO Patrick Pouyanne highlighted this during the Africa CEO Forum in Kigali, Rwanda. He stated, “The inconsistency in policy making decisions led to the diversion of $6 billion in energy projects to Angola over Nigeria.”

Pouyanne explained to the panellists that Angola offers a more stable policy framework, which is a crucial factor for businesses considering new investments.

It is essential to clear up some misconceptions here. While a high MPR might attract foreign portfolio inflows (driving foreign portfolio investment, or FPI), this is not a sustainable solution since these are short-term securities, aptly termed “hot money.”

“The current approach, which often results in “garbage in, garbage out” policies, could lead to catastrophic consequences if not rectified.”

On the other hand, foreign direct investment (FDI) requires more than just favourable methodological instruments; investors prioritise policy consistency before committing to long-term investments.

Policy makers must exercise caution to avoid putting the cart before the horse. No investor is willing to take unnecessary risks in an unstable environment. It is crucial to conduct a thorough analysis to address economic issues effectively. The current approach, which often results in “garbage in, garbage out” policies, could lead to catastrophic consequences if not rectified.

Furthermore, the recent trend of relying heavily on monetary tightening to address inflation overlooks the broader economic picture. High interest rates can stifle domestic investment and consumption, leading to slower economic growth.

The structure of Nigeria’s economy revolves significantly around both the formal and informal sectors. The informal economy, which is neither taxed nor monitored by the government, plays a crucial role.

Data from the Quarterly Informal Economy Survey (QIES) by World Economics, 2024, shows that the size of Nigeria’s informal economy is estimated to be 58.2 percent, representing approximately $1,230 billion at GDP and PPP levels. Additionally, according to the National Bureau of Statistics (NBS), 92.7 percent of Nigerians worked in the informal sector as of Q2 2023.

The hike in the MPR to 26.25 percent will significantly impact Nigeria’s informal sector, which comprises 58.2 percent of the economy. Higher borrowing costs are a major consequence, as informal businesses, often reliant on microloans, will face steep interest rates. This financial strain can limit their ability to sustain operations, expand, or invest in new opportunities.

Additionally, higher interest rates could lead to reduced consumer spending power as individuals cut back on expenses due to increased credit costs. This decline in consumer demand directly affects the informal sector, potentially leading to lower sales and profitability, further challenging these businesses in an already volatile economic environment.

A more balanced approach is needed. Fiscal policy should complement monetary efforts to stabilise the economy. This could include targeted government spending to stimulate growth in key sectors, tax reforms to encourage investment, and measures to enhance economic productivity. Importantly, transparent and consistent policy making is crucial to restoring investor confidence and fostering a more predictable economic environment.

Read also: MPC seen further raising interest rate to tame inflation

The government must also address structural issues such as infrastructure deficits, regulatory bottlenecks, and corruption, which continue to hamper economic progress. By focusing on these areas, Nigeria can create a more conducive environment for both domestic and foreign investments, ensuring sustainable economic growth.

While the recent hike in the MPR represents an assertive move to curb inflation, it is not a panacea. A holistic approach that includes stable and consistent policies, structural reforms, and a balance between fiscal and monetary measures is essential to achieving long-term economic stability and growth. Investors are watching closely, and the decisions made now will determine Nigeria’s economic trajectory in the years to come.