Nigeria’s rising interest rate and persistent inflation

Rising Inflationary trend is the most persistent threat to Nigeria’s growing economy.   The Central Bank of Nigeria and its monetary policy committee voted to lift the benchmark interest rate of previously 6.25 percent to 6.50 percent. The last time the monetary committee gathered at the end of fourth quarter of 2009, they left the interest rate unaltered at 6.25 percent. The inflation rate then was exceeding 13 percent although its surging momentum has since receded, yet inflation rate is still above 10 percent in the first quarter of 2011.

 

The  governor of Central Bank of Nigeria (CBN) promised to hold back inflation below 10 percent last year but  inflation rate is still moving upward in spite of the tighten of the monetary policy. Sometimes the CBN can be overly cautious with its application of monetary instrument to stem down inflation. When the benchmark interest rate was retained last year, Afripol financial experts commented on the timidity of the monetary policy committee in not raising the interest rate in the face of rising and persistent inflation.

 

Then Afripol commented that, “The Monetary Policy Committee of CBN is cautious in not altering the interest rate for fear of spurring any changes in the economy.  But their timidity is not justified because inflationary trend is rising and infusion of the funds is not going to slow it down. Therefore it is logical that Monetary Policy Rate (MPR) at 6.25 percent be increased not retained. Again Nigerian economy is expected to grow up to 10 percent in the preceding year and together with inflow of cheap money from both foreign and domestic investors may spur higher inflation.”  Therefore it may be little late, but the lifting of the benchmark interest rate will still be contributing in stabilizing and revising the inflationary trend.  But this is not the time to pass judgment on the process, for the key thing is to do the right thing for the economy and financial wellbeing of Nigeria.

 

Mr. Vincent Ogboi, an economic and financial expert at Afripol stated, “Rising inflation does not booster well for a progressive economic growth. Governor Sanusi must focus on inflation as a laser beam, with monetary policy at his disposal to bring the inflation rate to a single digit. One thing is to lower the inflation but another is to make it sustainable for long term economic growth. The rising prices of agricultural products and hydrocarbon need an intervention of the executive and legislative arms of government in plotting a strategy to revolutionize agriculture and energy sectors of the economy.

 

Ogboi further stressed that, "Nigeria must not forget that the time is now to diversity her oil based economy. Nigeria must harness her human capital and use it to her full advantage. Oil resources may not last forever but human capital with a large population base is going nowhere soon”

 

Without doubt, Nigeria’s economic fundamental is relatively healthy. The GDP is growing at an impressive rate. The growth annual rate of 2010 was about 7.8 percent with a striking 8.29 percent at fourth quarter of last year and the economy is expected to grow above 8 percent in 2011. Naira is relatively strong when compared to dollar, in spite of the continuous withdrawal from Nigeria‘s foreign reserve which act as a war chest against aggressive currency speculators. The minister of finance was forecasting a more liberal growth of 10 percent on the grounds that infrastructures and electricity will be upgraded and improved. The level of investments flowing into the economy and Nigerian stock exchange are quite impressive.

 

Nigeria has injected a lot of money into the monetary base to recapitalize the banks that were bailed out from total collapse due to mismanagement.  Nigeria recapitalized the banks with almost $4 billion and Nigeria’s Asset Management Corporation (AMCON) is buying back toxic debts from bad banks at the tune of $14 billion. The liquidity flowing into the economy due to quantitative easing has the tendency to overheat the economy, thereby triggering inflationary trend.  At same time the quick economic growth that attracts investment can over stimulate the economy and keep the inflation surging.

 

On the borrowings of large amount of money, Nigeria’s debt-to-GDP ratio may be minimal but that will not be an inducement for excessive borrowing. All the borrowings are bringing in a lot of money into the circulation and that too can exert inflationary pressure on the economy.  The borrowings Nigeria made last year was enormous but it is not cooling off in 2011. Reuters reported that “Sub-Saharan Africa’s second biggest economy (Nigeria)  plans to issue 66.5 billion naira in February, including 36.5 billion naira in three-year and 30 billion naira in five-year bonds. For March, the DMO said in its offer calendar it would issue 30 billion naira each in three-year and five-year paper.”

 

The achieving of lower inflation cannot be left only to the reserve bank. All the branches of the government and economic sectors have roles to play. Government will deliberately encourage the consumption of local manufactured products. Agriculture must be improved not only in preservation and storage but availability to all the corners of the country is intrinsic. This is where the improvement of transportation and infrastructure comes in.  The over creation and printing of naira must be decelerated no matter how tempting it might be.

 

Governor of Central Bank Nigeria and its monetary policy committee have to be on top of the issue of rising inflation. The problem of inflation can retard economic growth and dwindling away gained economic progress.  In case of Nigeria with a problem of high unemployment, inflation can make matters worse by discouraging research and development. The ramification is that employers will have no appetite to produce and hire in economy weaken by inflation.