How Would Interest Rate Hike Affect Nigeria’s Economy?

Economists and manufacturers react to the increase in the benchmark interest rate by the Monetary Policy Committee of the Central Bank of Nigeria from 12 to 14 per cent

My view is that the hike in interest rate is not appropriate at this time. Business and the economy are grappling with too many shocks already, which are increasingly becoming impossible to bear.

I am referring to the shock from exchange rate depreciation, which has had a profound effect on operating costs across sectors, translating into high energy cost and acute shortage of gas affecting the operations of many industries. High interest rate has become a major burden for many investors and high non-performing loans are posing a serious risk to the stability of the financial system.

These challenges underscore the need for policies that would stimulate the economy. I appreciate the concern about inflation, which informed the decision of the Central Bank of Nigeria. But the bigger worry is how to stimulate growth and rebuild confidence in the economy. I believe the private sector capital, both local and foreign, would respond positively if confidence is restored and investment opportunities are created. Positive expectations about returns on investment could offset short-term worries about interest rate rise. Eventually, an increase in productivity would ultimately improve output and moderate inflationary pressure.

As the CBN said, current inflationary pressure did not result from monetary factor; it is, therefore, unlikely that it could be fixed by monetary policy. It is largely driven by the fall of the naira, high energy cost and high transportation cost/import restrictions. Tackling inflation could only be effectively done within the context of these factors.

It should also be acknowledged that monetary policy instruments cannot solve all the problems. It would be overambitious of the monetary authorities to aim at doing this.

What the CBN did was actually the right thing to do, especially with the inflation rate hitting 16.5 per cent. If it failed to do that, attracting investment would not be possible. But for manufacturers, the implication is that interest rate would go up, and the cost of borrowing would increase.

Manufacturers would have to borrow money at a higher rate, which is against the clamour for a single-digit interest rate. The cost of doing business would increase. This should be a thing of concern to us.

We would continue to talk to government to see how it could establish a special window for manufacturers to access funds at a single-digit interest rate.  This is the only way out of the current challenge. We should set up more development banks in addition to the Bank of Industry so that there could be cheap loanable funds for manufacturers. Read more

Culled from Punch