The Central Bank of Nigeria (CBN), the country’s supremely reserve bank has made a decision of hiking the interest rate from 11% to 12%. It was puzzling to many financial and monetary observers because it was less than three months that CBN reduced the interest rate from 13% to 11%. Then it appeared that the monetary policy was gearing towards enhancement of liquidity, but the latest u-turn has thrown cold water to the pursuit of liquidity.
The reversal by CBN was triggered by the rising inflation and the logical step at its disposal was to restrict and constraint monetary policy. With the weakening of oil price and paucity of foreign exchange, the import based economy of Nigeria is suffering greatly. Nigeria being a recalcitrant country has refused to diversify her economy and failed to invest timely on agriculture, where she enjoyed the maximum comparative advantage.
Many essential commodities and food products are still imported and whenever there are restrictions in importation, it does trigger inflation. Those that bear the greatest brunt of inflationary trends are poor Nigerians. About 85 % of the population are living with stagnant or no income and are surviving with less than one dollar a day.
Due to the nosedive of oil price, country generated limited foreign exchange; therefore importers rely on the parallel market for acquiring of foreign exchange at a much more exorbitant price. With fewer products in the market, the prices of food products will go up and those consumers with fixed income are barely surviving in the consumer market.
In order to checkmate the surging inflation, CBN resort to hiking of interest rate. The mopping of liquidity has its downside for it will principally depress business expansion and commercial growth. The prospect of solving the issue of inflation becomes more elusive, if not dim because of the circumstances Nigeria found herself. One of the matters rising from constraints of monetary policy is the emergence of illiquidity. It implies that the interest rate of borrowing will be higher and that is a major discouragement to the business community and marketers.
The inflationary trend will not be resolve by hiking of the interest rate; Nigeria’s problem is much deeper than that. Despite the attraction of higher interest rate, the investors are not coming because of country’s debilitated infrastructures, poor image, remittance policy and price instability.
This is just the beginning; the more hiking of interest rate appears to be the call of the future because inflationary pressure is not going to ease due to 1% hike. The country’s reserve bank has demonstrated its limited monetary policy contribution that may become waned in face of daunting challenges as the fiscal policy of the executive is struggling to define itself.