Inflation, interest rates portend tougher times

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THE latest spikes in interest and inflation rates have elicited apprehension among the business community, ordinary Nigerians and global agencies. For the fourth time since May, the Central Bank of Nigeria raised its benchmark lending rate in its long-running but (so far) losing battle against inflation, signalling tighter access to credit for the productive economic sectors. With inflation at 21.09 per cent and the naira in free fall, experts are warning the general population and businesses to brace for tougher times ahead. The fiscal and monetary authorities should pay attention.

For a community already contending with negative economic and human development indices, the omens are foreboding. Rising from its regular Monetary Policy Committee meeting, the CBN raised the MPC rate (the rate at which deposit money banks borrow from the apex bank), to 16.5 per cent, up from 15.5 per cent. It had been raised from 11.5 per cent in May to 13 per cent, to 14 per cent in July, and 15.5 per cent in September.

Justifying the hike on the need to “sustain the gains of the last three rate hikes,” CBN Governor, Godwin Emefiele, stressed the need to tighten the system and maintain economic stability even as the Cash Reserve Ratio was retained at 32.5 per cent.

But the gains he mentioned have not materialised, indeed the incremental rises in MPC rate are said by organised private sector organs to harm rather than benefit the economy. They note that inflation has actually been rising; from 15.92 per cent in March, to a 17-year high of 20.77 per cent in September and even higher to 21.09 per cent in October.

This is not surprising as energy prices have been rising too; average prices in the third quarter of 2022 as surveyed by the National Bureau of Statistics showed increases in the average price of petrol from N165-170 per litre to N195.29 across the country; diesel at N801.09, kerosene at N947.30 and Liquefied Petroleum Gas at N4,483.75 per 5KG. Electricity tariffs have also been raised.

With these, food prices have shot up, and deepened hunger and poverty. As an import-dependent country, the continued fall in the value of the naira against other world currencies adds to the misery of producers, importers and the populace.

OPS representatives have not minced words on the negative implications of these indicators for the economy. Deputy President of the Lagos Chamber of Commerce and Industry, Gabriel Idahosa, faulted the MPC hike, arguing that where you have high unemployment and inflation, the better option is to lower rates. Others predict further job losses and factory closures.

The PUNCH reported that over 50 Nigerian factories have shut down in the five years to April 2022, with the Manufacturers Association of Nigeria blaming power and forex shortages, as well as the generally poor operating environment. MAN explained that with 48 per cent of their raw materials imported by 77 domestic economic sub-sectors, the forex scarcity devastates businesses. The Nigerian Association of Small and Medium Enterprises said over 600,000 micro, small, and medium enterprises collapsed in the year to October. 

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Power shortages, scarcity and high cost of diesel and lubricants, and poor ease of doing business are taking a huge toll.  The jobless rate is appalling and forecast to worsen. Unemployment stands at 33.3 per cent says the NBS, which is bad enough; the enormity of the crisis is however revealed in the figure of 42.5 per cent youth unemployment which when further combined with the figure of 21 per cent youth underemployment, totals 63.5 per cent of the country’s most active population idle.

Continued complacency and wrong policies are becoming more dangerous. The President, Major General Muhammadu Buhari (retd.), and his economic team need to adopt more effective policies to revive the economy, and stimulate job creation and productive activities. Emefiele’s exertions at the CBN have not tamed inflation, saved the naira, or tempered interest rates. Both sides should collaborate, devise and harmonise fiscal and monetary policies to achieve these objectives.

The convention is that onward lending by DMBs can be 4.0 per cent above the MPC rate; this translates to at least 20.5 per cent interest available to even prime customers; for others, especially the vulnerable SMEs and start-ups, obtaining favourable credit lines has become more daunting. Even before the latest rate adjustment, lending at the DMBs as at November 11, showed rates as high as 24 per cent to 36 per cent in some sectors.

Emefiele’s optimism that inflation will decrease steadily in 2023 to less than 15 per cent is not widely shared, though all agree that inflation is currently a global scourge – fuelled by the fallout of COVID-19, natural disasters, and the Russia-Ukraine war.  The World Bank has again warned Nigeria to reform the forex market, resolve its revenue crisis, reorder tax management, and phase out its “costly, regressive fuel subsidy” or face imminent economic hardship.   

Apart from these measures, the federal and state governments have to cut waste and the cost of governance, block revenue leakages and patronise locally-made goods in their procurement to boost domestic businesses and conserve foreign reserves.

MSMEs typically create the most jobs, boost exports, innovation and competition; the government–federal and states–should adopt practical, emergency policies to stimulate this segment. A slew of incentives are said to driving the SMEs revolution in India where they contribute 45 per cent of its manufacturing output and 40 per cent of the country’s total export. In China where over 90 per cent of all enterprises are SMEs, providing 75 per cent of employment and 68 per cent of exports, the authorities rolled out new incentives in 2019 to further energise small businesses, including tax relief, low interest credit, and supporting innovation and ICT.

Emefiele needs to harmonise forex rates, manage inflation more effectively and explore more result-oriented strategies to bring down interest rates.

With 133 million Nigerians now adjudged “multi-dimensionally poor” and food shortages expected in the 2023, insecurity rampant and revenues drying up, Buhari and the CBN should partner with the OPS, shift to emergency mode, and implement policies to avert the predicted adversity. ,

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