Clem Aguiyi 
Africa’s largest economy is not yet at the right place where it is supposed to be in terms of productivity. With inflation at 32.15% and rural unemployment surging at 4.3%, inflation and unemployment remains core issues bothering not just the Central Bank of Nigeria (CBN) but also the Federal Government of Nigeria.
Yemi Cardoso, the CBN Governor, is worried about rising unemployment rate, the possibility of the economy sliding into recession or stagflation if there is no strong collaborative effort between the fiscal policy and monetary policy. Nigeria’s inflation rate has been stubborn for obvious reasons such as over borrowing, abuse of the ways and means, frivolous spending and other factors which need not be restated here since both the CBN and Federal Government are addressing those factors.
The president has made economic recovery a key agenda of his government. The reforms being implemented by the new CBN Governor and the Federal Government has seen the economy slightly inching towards recovery and potential prosperity if the efforts are sustained. The CBN targets a 21% inflation rate ending 2024.
Though not an ambitious aspiration for Africa’s largest economy, if things remain steady on the demand side, supply side and with the monetary policy and fiscal policy all supportive, it is quite possible that by the first quarter of 2025, the inflation rate may be lowered even below 21%.
By economic textbook standards, a tool generally employed by Central Banks to curb inflation is to increase interest rates. Since inflation is defined as too much money pursuing few goods, the goal of a high interest rate by Central Banks is designed to reduce the money in circulation in order to control inflation.
The CBN raises interest rates to tackle inflation, hence reducing the high cost of living. The approach also reduces frivolous spending, protects and restores purchasing power. But this is not always the case in practice as an increase in interest rates amidst stubborn inflation could also worsen inflation rate, hamper businesses growth and throw thousands out of jobs.
Nigeria for instance is a country where Small and Medium Enterprises (SMEs) account for 96% of its business activities and provide more than 80 per cent employment opportunities. There is fear that the new interest rate regime may worsen bad loans, stifle production and fuel the already high unemployment rate.
This is a genuine concern as reduction in access to funds could lead to economic contraction , slow down the growth and expansion of businesses and make living conditions worse as the increase in interest rate will be passed on to consumers. Nigeria is not the only country that has had to grapple with high interest rates.
Infact nearly all the countries and jurisdictions of the world are still trying to return inflation to their long – term targets after the disruption in supply chain caused by COVID-19 and on-going war between Russia and Ukraine. In the United States and European Union shifts in demand and supply, as well as high energy costs push inflation to an all time high of 9.5% and 11.5% in 2022.
Even at that, the US Federal reserve and other developed economies faced with inflationary crisis recently decided to lower interest rates to save businesses from collapse and keep jobs. In view of recent developments around the world, one would expect that the CBN, having raised interest rates for three consecutive times this year, would this time lower interest rates.
But in a move that stunned many industry watchers, the CBN at the end of its Monetary Policy Committee in September 2024 voted in favour of raising the monetary rate policy by 50 basis point to 27.25%. There are reasons for this tough decision. CBNs target to lower inflation to 21% by the end of 2024 seem far-fetched as economic conditions worsens. Nigeria’s major sources of income are oil and gas which is dollar denominated.
The naira is pressured by the demand for dollars and the CBN needed to discourage commercial banks in particular from borrowing excessive naira to purchase dollars from the CBN. It is expected that this move by CBN will help stabilise the naira which ended its lowest exchange this September at N1, 650 to a dollar.
Time will tell if CBN’s MPC was right or wrong. The Chief Executive Officer of Financial Derivatives, Bismarck Rewane has said the adjustment of the asymmetric corridor around interest rate by the CBN’s Monetary Policy Committee will reduce the pressure on Nigeria’s Foreign Exchange.
The renowned economist disclosed this on Channels Television while reacting to CBN’s hike in interest rate by 50 basis points to 26.75 per cent. He explained that the real deal is the MPC’s adjustment of the Asymmetric corridor around the Interest rate to +500/-100 from +100/-300 basis points.
He noted that this move would increase the cost of banks’ borrowing and deter borrowing from CBN to buy foreign exchange. He added that the decision will boost Foreign Portfolio inflows in Nigeria.
“The interest rate increase is 50 basis points. The real deal is the asymmetric corridor adjustment. What this means is that banks have been borrowing from the Central Bank to buy foreign exchange from the Central Bank. Before they were borrowing at 26 per cent.
“As of today, they will be borrowing at almost 32 per cent. That difference is almost 5-6 per cent. It means the cost of borrowing has gone up astronomically, this means a deterrent to borrowing from the CBN to buy FX. “That should reduce pressure on the foreign exchange rate.
According to Rewane CBN took the tough decision as a subtle way of telling banks to stop robbing Peter to pay Paul,” he said. The CBN raised interest for the fourth time in 2024 to 26.75 per cent amid efforts to tackle core and food inflation which stood at 34.19 per cent and 40.87 per cent, respectively.
This higher interest rate environment is expected to drive dollar liquidity as investors will be in search for markets that give higher returns in investment. This is based on the principle that high interest rates give higher returns.
High interest rate returns environment will yield high returns for individuals with excess funds who can fix their money in financial instruments and earn higher interest.
Funds in savings, fixed deposits, bonds, debentures and other fixed income securities will become highly attractive. As already cited above, it is also expected that forex inflows from investors will ensure the stability of the naira and improve consumer spending power
