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You are here:Home>>Strategic Research & Analysis>>Nigeria hiking of interest rate is anti-growth policy
Monday, 01 August 2016 14:42

Nigeria hiking of interest rate is anti-growth policy

Written by Administrator
Emeka Chiakwelu Emeka Chiakwelu

“Ceaseless jacking up of interest rate will further soften naira, impeding industrial growth and accelerating inflationary trends.”

 

 

Nigeria is in dire economic straits and the de-pegging of the naira is not making things better in foreseeable future. As unrestricted naira continues to float, its value nosedives, weakens and deteriorates. Naira at one point in the forex market was trading at 377 to a dollar, fast approaching the value at the parallel market. Since the introduction of naira as a national currency, even with abundant foreign revenue, naira has not been properly managed. The problem of naira was rooted on fundamental mismanagement of the economy that heavily depended on crude oil export for foreign exchange.




The recent hiking of the interest rate by 200 basic points from 12 percent to 14 percent may actually undermine pro-growth and pro-solvency policy.  Central Bank of Nigeria (CBN) and its monetary policy committee intention for the hiking of the interest rate was to attract investors in the capital market portfolio and rein in the rising inflationary trends. 




But the downside is that Nigeria’s economic quagmire maybe too stubborn for the theoretical application of the textbook monetary policy.  Already Nigeria is stepping into recession with first quarter GDP contradiction by -0.4 percent and anticipated -1.8 percent in the second quarter. The ceaseless hiking of interest rate will not stimulate growth but rather have a contradictory effect. Ceaseless jacking up of interest rate will further soften naira, impeding industrial growth and accelerating inflationary trends.



The floating of naira and dwindling foreign exchange pose a challenge that is beyond the CBN weak hand of its monetary policy. With the sagging of naira comes an increasing inflationary trend.   According to National Bureau of Statistics (NBS) the inflation rate stands at 16.5 percent and rising. The reality is that the given inflation rate is not even buttressing the level of suffering and hopelessness in the country.  That is why many economist and financial managers are questioning the validity and veracity of the numbers coming from the National Bureau of statistics (NBS).



Take for instance, the prices of the basic staple foods including rice, beans and garri are almost beyond the purchasing power of average Obi, Musa or Dele. Too many families are not adequately eating three square meals.



As interest rate hiking continues in order to control rising inflation, the prices of food products will continue to be higher. The doors of hunger and starvation are opening wider for more poor and working class Nigerians.  This is not good at all, CBN must be careful by not making things worse by their active usage of the instrument of contraction to invigorate naira.


The danger with hiking of interest rate is the enhancement of the mopping of liquidity in already credit crunch market. It will further restrict loquacious flow of naira and discourage business community from getting loans for further commercial expansion. Even with intensive de-watering of the liquidity, the culminated harsher credit crunch will cause commercial slow down and closures.



With higher borrowing rates, products become more expensive and the rudimentary consumers bear the brunt of it. As the inflationary trend increases the CBN will continue to hike the interest rate and the misery index will continue to deepen. The attraction of portfolio investor’s maybe a pipe dream, if not elusive, because investors especially the foreigners do not have affirmative impression of the macroeconomic stability and wellbeing of the country. 



Emeka  Chiakwelu, Principal Policy Strategist at AFRIPOL. His works have appeared in Wall Street Journal, Huffington Post, Forbes and many other important journals around the world. His writings have also been cited in many economic books, publications and many institutions of higher learning including tagteam Harvard Education. Africa Political & Economic Strategic Center (AFRIPOL) is foremost a public policy center whose fundamental objective is to broaden the parameters of public policy debates in Africa. To advocate, promote and encourage free enterprise, democracy, sustainable green environment, human rights, conflict resolutions, transparency and probity in Africa.   This e-mail address is being protected from spambots. You need JavaScript enabled to view it       www.afripol.org

 

Last modified on Friday, 05 August 2016 15:56

2 comments

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  • Comment Link Jessika Friday, 05 May 2017 23:58 posted by Jessika

    Greetings! Really helpful advice on this article!
    It really is the little changes that make the biggest changes.
    Thanks a lot for sharing!

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