Nigeria hiking of interest rate is like playing with Russian Roulette

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

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 basis 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 were 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
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 squared
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 trends
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.

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