After Nigeria’s hard stance and pain of liberalising the foreign exchange (FX) market as well as halting the opaque fuel subsidy regime, the environment is seen ripe for a lower interest rate environment to boost local production. This according to analysts who spoke to BusinessDay is capable of creating jobs and improving balance of trade terms as well as balance of payment position.
Tatonga Rusike, Bank of America (BofA) sub-Saharan Africa economist had said Nigeria may need to increase interest rates by at least 700 basis points before the end of the year to curb inflation, saying inflation may quicken to 30percent by the end of the year from 22.4percent in May.
Africa’s biggest economy’s inflation rate is already at an 18-year high and the CBN has in a bid to curb the rising cost of goods and services raised the borrowing costs by 700 basis points since May 2022.
“Hiking interest rate to checkmate inflationary pressures and/or achieve a positive real interest rate at this time in Nigeria is counterproductive,” according to Abiola Rasaq, former Economist and Head, Investor Relations at United Bank for Africa Plc.
While taking contrary position on the views of BofA analyst, he said, “It is important to note that hiking interest rate to checkmate inflationary pressures and/or achieve a positive real interest rate at this time in Nigeria is counterproductive and such would deny the country the full benefit of the reforms being pursued thus far by the new administration. It is important to note that the current inflationary trend is not money-driven. While the banking system is liquid, household and corporate debt penetration remains low and money supply has not grown beyond policy target”.
Also speaking, Muda Yusuf, chief executive officer, the Centre for the Promotion of Private Enterprise said, “that is too much. That is outrageous. Excessive hike in interest rate is not the remedy to reduce inflation.”
He said continuous hike in interest rate hurts investment and borrowers bear the brunt, adding that Nigeria should be cautious to improve supply side of FX, energy cost, logistics cost and consequently, FX pressure will moderate.
According to him, the tight global monetary conditions had made access to global capital costly and difficult for developing economies. “It also triggered global capital flow reversals from emerging economies. The phenomenon has weakening effect on the domestic currencies of the developing countries. These global headwinds had a dampening effect on economic growth in the first half of the year,” he said.
“There is an urgent need to address the social outcomes of the recent reforms, especially the inflationary pressure induced by the fuel subsidy removal. Urgent measures need to be put in place to mitigate the soaring cost of living and the escalating operating and production costs, especially for of businesses,” Yusuf added.
Speaking further, Rasaq said: “Unlike, in developed and few emerging markets, where monetary policy transmission mechanism is strong, especially as regards the passthrough impact of interest rate on household demand, the linkage is limited in Nigeria, given the very low leverage of households and overall weak credit system.
“So, rather than stemming consumption, the effect of higher interest rate is more felt on production, a phenomenon which would tend to hurt jobs and exacerbate the inflationary pressures, as production and supply levels wane, on the back of higher corporate borrowing cost and elevated cost of equity.
“In fact, in developed countries where household leverage is high and monetary policy transmission mechanism is strong, how many countries have positive real rate. Even in the United Kingdom, where policy rate has been hiked from zero at the start of 2022 to 5percent, we still have negative real rate, as inflation rate remains around 8.7% level. It would possibly take most developed countries another 2 years to bring down inflation rate to target levels and possibly have positive real rate. So, a call for positive real interest rate for Nigeria at this time may be purely theoretical,” he added.
According to him, “More importantly, the current inflationary pressures in Nigeria are largely structural in nature and indeed majorly reflects supply constraints, as aggregate demand remains largely subdued due to stagnated income levels amidst a host of other factors. For instance, the removal of fuel subsidy, liberalisation of FX and recalibrated electricity tariffs are part of the puzzle of the rising inflation rate and these do not suggest higher consumption/demand that needs to be doused with higher interest rate, rather policies should be geared towards helping to sustain consumption by mitigating the impact of the policies on already low consumption of basic necessities.
“So, it is absolutely irrational to claw back loanable funds and money supply using higher interest rate at a time when both monetary and fiscal policies should be directed towards boosting the productive base of the country to fill supply gaps. In fact, a more effective way to check inflationary pressure would be to stimulate production and address supply constraints, including leveraging measures that appropriately direct credit and policy incentives towards production as well as measures that addresses route-to-market/distribution bottlenecks,” said the former Economist and Head, Investor Relations at United Bank for Africa.
His words: “Again, the government is bullish on infrastructure spending and would need to better manage the current debt stock in a way that does not choke the budget, given currently high debt service burden, so why should we further constrain already challenged fiscal position with an unnecessary high interest rate. I believe with the liberalisation of the FX regime, the focus of the government should be on using relevant reforms to attract foreign direct investments as against foreign portfolio investments, which tend to focus largely on interest rate differential and positive real rate regimes.
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“More so, genuine foreign portfolio investors seeking exposure can still benefit from the current market environment and really do not necessarily have to wait for the late teens returns, so far, the interest rate differential is attractive enough, considering the fact that exchange rate risk has been relatively addressed, with possibility of foreign portfolio investors making gains on Naira in the medium term.
“In my opinion, foreign portfolio investors calling for a positive real rate in Nigeria may be considered to be those searching for alpha at zero risk, and those perhaps should not be the focus on the new administration in terms of foreign capital attraction. The country at this time needs genuine investors, as it ends the debatably wasteful spend on the defense of the Naira over the past decade, where the apex bank doled out risk free return to FPIs, in a way that bled the country’s external reserve and perhaps enriched a few locals at the expense of the country’s poor majority,” he stated.
Nigeria’s annual inflation rate accelerated to 22.41 per cent in May from 22.22 percent in the previous month.
Razia Khan, Managing Director, Chief Economist, Africa and Middle East Global Research, Standard Chartered Bank, said “We see another 150bps of tightening to 20percent by year-end. While inflation in second half (H2) 2023 is likely to spike higher on the fuel subsidy removal, this will be a temporary rise driven by an important and much-needed fiscal reform.
“On a one-year forward basis, we see little reason for the authorities to react to the fuel price increase (tighter fiscal policy) with much more restrictive monetary policy, as the subsidy reform will reduce disposable incomes in any case,” she said.
“I believe that the balance of risks continues to be tilted against price stability. As such, maintaining a tight monetary policy stance over the short- to medium- term horizon is ideal,” Edward Lametek, CBN’s deputy governor said in his personal statement at the last MPC.
Godwin Emefiele, suspended CBN governor, who chaired the meeting noted that the Committee tasked the Bank’s Research and Monetary Policy Departments to evaluate the counterfactual evidence from available data, using empirical analysis and the results revealed that following each monetary policy rate hike, the rise in inflation moderated relative to what it could have been, if the MPC had not aggressively raised rates at all.
Headline inflation in the view of the MPC members, remained high due largely to a host of non-monetary issues outside the reach of the central bank such as the perennial scarcity of Premium Motor Spirit (PMS) and expectations of short-term hikes in the pump price of PMS; high and rising price of various energy sources; and a host of headwinds confronting the food supply chain.
