Maintaining high interest rate may not keep inflation down

Maintaining a low and single-digit inflation rate in Nigeria amid a reckless fiscal disposition will require a more concerted effort between monetary and fiscal authorities.

While Nigeria’s central bankers have committed to keeping all monetary parameters constant with the hope that the country’s growth trajectory will remain positive and progressive, leaving the anchor rate – the monetary policy rate (MPR) – at 11.5 percent may not assume the desired potency towards an inflation drive down.

The Central Bank of Nigeria, in its last monetary policy committee (MPC) meeting, announced the retention of key monetary rates with the hope that Nigeria’s recovering economy will maintain a stable ascent towards a post-crisis recovery. However, there are sceptics regarding how growth-enhancing this decision will be, considering the current administration’s poise towards the fiscal management of the economy.

Occasioned by excessive internal and external borrowings, which has plunged the country into massive indebtedness, over-concentration of budgetary allocations to recurrent expenditure, low revenue generation, and massive public financial mismanagement, Nigeria’s central bankers may have a hard time with keeping the mandate stable prices across all sectors of the economy.

The central bank governor, Mr Godwin Emefiele, in the last MPC meeting, announced that the MPR would remain at 11.5 percent, with an asymmetric corridor of +100 and -700 basis points around the MPR, the cash reserve ratio (CRR) will remain at 27.5 percent, and the liquidity ratio will remain at 30 percent respectively. The governor noted that this decision, together with growing agricultural sector interventions, will help moderate rising inflationary concerns.

Throughout the year 2021, the MPR was also held constant to accommodate the country’s economic growth fragility and to augment post=pandemic growth recovery efforts. Furthermore, the governor stated that monetary efforts were intentionally situated to put up with the nation’s sensitivity to external and internal uncertainties, given the current global exposure to economic, health and climate shocks.

How the nation may forbear with increasing inflationary trends, which is now a global phenomenon in the face of growing uncertainties in international financial markets, logistics and supply chain bottlenecks, and labour market frictions, remains a concern. Pointing towards universal economic heating, Nigeria’s response to a sustained elevated rate may lag well behind other developed countries with more sound economic and financial fundamentals.

Read also: Single-digit inflation eludes Nigeria in 72 consecutive months

A cross-comparison among some developed and emerging countries show that an upsurge in global indices may be transitory since their fundamentals remain comparably strong, different from Nigeria’s. In the US, for instance, the Federal Reserve rate stands at 0.25 percent, and the inflation rate currently sits on a 7 percent mark as of December 2021. Also, the country retains a GDP growth of 2.5 per cent as of Q3 2021, while the total national debt as of December 2021 is $29.6 trillion. The country’s unemployment rate stands at 3.9 per cent.

The UK also share a similar 0.25 percent benchmark interest rate as does the US and a 5.4 percent inflation rate. Year-on year, the UK economy grows at 6.8 per cent (as of Q3 ‘2021) and maintains a $2.94 trillion national debt position as of 2020. The unemployment rate in the UK as of September 2021 is 4.3 percent. For China, the People’s Bank retained the benchmark interest rate at 3.70 percent, while the inflation rate stands at 1.5 percent (as of December 2021). The Chinese economy saw an 8.1 per cent growth in 2021 and maintained a public debt of $7.0 trillion (2020 estimate). China’s unemployment rate stands at 5.1 percent (2021 estimate).

For South Africa, the central monetary authorities have maintained a 3.75 percent interest rate and the inflation figure for the country as of November 2021 is 4.91 percent. The nation’s economic growth (year-on-year) as of Q 2021 stands at 2.9 percent, while public debt records hit $261 billion as of October 2021. A high unemployment rate due to the Covid-19 pandemic, austerity measures, increasing inequality and poor government policies stands at 4.9 percent (Q3 2021 estimate).

India’s economy retains a 4 percent benchmark interest rate while the inflation rate records 4.91 percent as of November 2021. The Asian economy records a projected 2021-2022 GDP growth of 9.2 percent while owing up to $570 billion as external debt. As of December 2021, India’s unemployment rate stands at 7.9 percent.

Nigeria’s unique case among the countries mentioned above suggests a relatively weak macro fundamental to sustain a declining inflationary trend while hoping for a progressive growth experience. The benchmark interest rate stands at 11.5 percent, which is the highest among the other five countries mentioned. The inflation rate in the country as of December 2021 is 15.4 percent, which is also the worst of all six compared nations. GDP growth as of Q3 2021 is 4.03 percent, and the country’s national debt stands at $38 trillion, the highest among all compared countries. The unemployment rate in Nigeria currently stands at 33.3 percent, the highest among all compared countries just after South Africa.

It is easy to note that Nigeria’s interest rate is the highest among all the six compared nations, and it is the only country with a double-digit inflation rate. Furthermore, the country’s fiscal position seems to be the worst, and the immediate effect on the real economy, as seen from the unemployment figure, is the worst, just after South Africa.

Hence, the CBN’s justification for maintaining a high interest rate with the hope that price stability will ensue over time and that the high inflation rate in the country is consistent with global experiences in the same similitude is not sufficient. Therefore, fiscal managers of the country must work hard to drive down debts and curtail revenue inefficiencies while the monetary authorities must prioritise supply management policies, especially in the credit and foreign exchange sectors of the economy if high inflation must be beaten down to pave the way for sustainable real economic growth.

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