• Monday, May 27, 2024
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BusinessDay

Nigeria delivers much-needed rate cut, but is there room for it to work?

CBN

Nigeria unexpectedly cut its monetary policy rate last week in the hope it can spur growth for an economy reeling from years of under investment in key sectors.

Last quarter, Nigeria reported its steepest drop in gross domestic product in at least a decade and the GDP print out for the third quarter is likely to show that Nigeria has entered its second economic contraction in four years.

The cut to 11.5%, a rate not seen since 2016 was supported by six of the 10 members of the monetary policy committee who attended its last meeting, is the second this year and came against the forecast of all six of Bloomberg’s economists who were surveyed prior to the MPC decision.

Nigeria’s economy which never really recovered from its last recession in 2016 has been hammered by the coronavirus pandemic lockdown and the severe oil price collapse that it caused.

The MPC also adjusted the asymmetric corridor, which means the cost at which lenders borrow was lowered to 100 basis points above the monetary rate. Add these measures to earlier interventions which raised the minimum loan-to-deposit ratio for banks.

Read Also: Nigeria’s big banks see 13% dip in interest expense as customers’ deposits hit 4-year high

It is yet one more step by the monetary authorities to kick life into an economy that has been better defined by structural bottlenecks and an acute foreign exchange shortage which hold down growth.

The classical response to a rate cut this significant is for businesses to invest more and it is why the authorities are banking on this measure.

However, Nigeria’s economy is far from being in a classical state and so its response to the rate cut cannot truly be gauged until the results come in.

While the authorities are right to expect that the rate will lead to positive expansion in economic activity, some economists are betting on the contrary.

Given business people are all rational, it is perhaps not far-fetched to predict that wearied investors in Nigeria troubled more by the macro-economic disequilibrium may continue to hold or even seek the exit door as could be the case with foreign portfolio investors stranded in the country.

In another hand, these investors may even compound the woes of the authorities by taking advantage of cheap Naira to chase after the US dollar, a situation which will further sink the economy.

After the rate cut announcement, Bloomberg published the view of its Africa economist Boingotlo Gasealahwe who said, “The rate cut is unlikely to achieve the desired effect.” According to Bloomberg’s economist, “what is more likely in our view is for growth to continue to be undermined by on-going currency restrictions, and for inflation to continue to accelerate.

“This will intensify the current dilemma facing the monetary policy committee and weaken the effectiveness of monetary policy even further as the central bank adopts an ever-widening array of distortionary tools that pull in different directions in order to reconcile these competing objectives.”

The same businesses that are being enticed with the rate cut are already traumatized and hurting from the debilitating effect of the pandemic and also from the acute foreign exchange shortage.

That’s the hard nut that has to be cracked. For Oluwasegun Akinwale, research officer at Nova Merchant Bank, “any policy that focuses on stimulating credit growth alone without a major revamp of the structural bottlenecks in the economy will do little to boost output.”